Standing Committee D

[Mr. Eric Illsleyin the Chair]

Clause 642

The panel

Question proposed [13 July], That the clause stand part of the Bill.

Question again proposed.

Quentin Davies: I had finished my remarks on this subject when we broke, but the Solicitor-General indicated that he wanted to intervene. Perhaps it would not be fair to deprive him of that opportunity, so if he wants to intervene—you will notice that I am speaking very slowly, Mr. Illsley—I shall happily remain on my feet, notionally, to take the intervention that I promised to take. I am a great believer in at least trying to keep one’s promises.

Mike O'Brien: I am grateful to the hon. Gentleman for remembering his promise. He always responds with courtesy, but I think the moment has passed.

Jonathan Djanogly: The Solicitor-General might feel that the moment has passed, but I asked over a dozen questions earlier, and my hon. Friends the Members for Clwyd, West (Mr. Jones), for Grantham and Stamford (Mr. Davies) and for North-West Cambridgeshire (Mr. Vara) all made pertinent remarks in their speeches. Perhaps the Solicitor-General will do us the courtesy of responding.

Mike O'Brien: I am afraid that the hon. Gentleman was so discourteous in his comments and spoke at such length that I was not quite sure what he was asking at any particular point. His contribution was more about wasting time than about asking pointed questions. During the debate, I tried to respond to particular, more pointed, issues that were raised by his Back-Bench colleagues. I hope that I did respond to them.
I am not sure that there is much more that I can say about the comments made in the other place by my noble Friend the Attorney-General on the circumstances in which the takeover panel might cease to exist, because that is, as he then described, merely a fall-back position in case something goes wrong, but it is not anticipated that anything will.
The takeover panel is quite relaxed about—indeed supportive of—the broad thrust of our proposals and has made that position clear on all occasions. The hon. Member for Huntingdon (Mr. Djanogly) was candid in accepting that the panel broadly supports the proposals. I suspect that, with a few exceptions, he and the official Opposition also broadly support them, and that they wanted to waste some time this morning. Well, they have wasted it; I do not see why I should waste any more of the Committee’s time.

Jonathan Djanogly: Frankly, I find that response dismissive and rather upsetting. I might have made points at length, but that is not necessarily the case for those of my hon. Friends who spoke after me. The Solicitor-General might not think that our points are valid, but they certainly merit a better response than he just gave. Simply saying that they were covered by the Attorney-General in the other place is not an impressive response. Now that I have put that on the record, there is not much more I can say.

Question put and agreed to.

Clause 642 ordered to stand part of the Bill.

Clause 643

Rules

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: My comments on this clause also apply to clause 644 on further provisions about rules. The explanatory notes say:
“The Panel is given the power to make rules in relation to takeover regulation. The rule-making power is broadly drawn to ensure that the Panel can continue to make rules on the range of matters presently regulated by the City Code on Takeovers and Mergers.”
The notes go on to discuss certain provisions that are included. For example:
“The Panel is placed under an obligation to make rules as required by specified Articles of the Takeovers Directive”
and is permitted
“to make rules on takeover bids... mergers and other transactions affecting the ownership or control of companies.”
The explanatory notes continue:
“When making rules under this clause, the Panel must do so by a committee of the Panel, except in the case of rules for fees and charges under clause 657 which must be made either by a committee of the Panel or by the Panel itself.”
The panel has, at least in recent history, been fairly good at consultation on proposed rule changes, but how do we know that that will continue? Has the Department discussed that with the panel? My hon. Friend the Member for Clwyd, West made the valid point that there needs to be consultation on future statutory instruments. Have the Government considered how those will be tied in with the panel’s consultations?

Mike O'Brien: We are hoping that the panel will continue broadly to make its own rules, as it does now. The objective of setting this out in statute is to give the panel broad discretion. The intention is that, within the terms of the directive and the legislation, the panel will be empowered to make its own rules. Since 1968, it has laid down the rules in what is now called the City code on takeovers and mergers. Those rules have been recognised in statute and section 143 of the Financial Services and Markets Act 2000 provides that they are endorsed for the purposes of powers under the Act. Their importance is overseen by the panel and has been much respected by the courts.
Notwithstanding that, the code is a body of rules for which, historically, no express authority has been provided by law. The clause will change that and has two main objectives. The first is to implement properly the takeovers directive, which requires that rules on takeover regulation laid down by the directive are given legal effect. Consequently, clause 643(1) requires the panel to make rules in respect of the specified provisions of the directive. The directive applies to takeovers of a company trading on the regulated market and contains provisions concerning, for example, protection of minority shareholders and so on.
The second objective is that we wish to ensure that the panel’s rule-making authority over other areas of corporate activity that it has traditionally regulated continues. That includes matters outside the scope of the takeovers directive such as takeovers of public companies whose shares are not traded on regulated markets and mergers. We wish to preserve a unitary principle to the panel’s regulatory functions. It would not have been right to create one set of rules applying to takeovers under the directive and another applying to other types of corporate controls transaction, so clause 643 extends a right for the panel to make rules in areas of activity that are broadly regulated by the takeover code at present.
The proposed functions of the rules committee of the takeover panel, which I understand the panel has decided will continue to be known as the code committee, are set out in the revised introduction to the takeover code available on the panel’s website and, in accordance with its current practice, the panel intends to consult widely on any changes to its rules.
The Department has discussed with the panel how it proposes to go forward with this. I understand that it will continue, in so far as it possibly can, broadly to maintain the current regime through engagement with the City and those over whom it will in due course have some authority if there is a takeover and through consultation with them to ensure that the rules achieve broad acceptance in the City and the wider companies that it regulates.

Justine Greening: I have one brief question for the Solicitor-General. Subsection (2)(c)(i) states that
“any such bid or transaction is, or has been, contemplated or apprehended”.
Can he give more specific information on what “contemplated” means? Does it mean, for example, a discussion with board minutes? Will he give some specifics to help the Committee to understand how “contemplation” will be created, because clearly boards often consider matters that might never make it into official documents? Perhaps he can provide some clarity.

Mike O'Brien: Obviously, transactions will be considered and there might be rumours and tentative indications that something may happen. The panel may wish to ensure that the way in which it will deal with a new set of affairs is well known. It could respond to those circumstances were they to arise.

Question put and agreed to.

Clause 643 ordered to stand part of the Bill.

Clauses 644 and 645 ordered to stand part of the Bill.

Clause 646

Directions

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause provides for interim directions to be given to ensure compliance with the rules. Will the Solicitor-General please explain how it will work in practice? What activity will be required to issue an interim direction?

Mike O'Brien: The clause allows the panel to make provision in its rules giving directions preventing a person from breaching the rules in the interim while a matter awaits determination by the panel, or otherwise, to ensure compliance with the rules. This is an important facilitative provision, and once the panel has decided on the effect of a rule in a particular case, it can guarantee its interpretation by requiring relevant parties to do or not do certain things in accordance with the ruling. Its regulatory power is necessary and proportionate.
Persons affected by a decision of the panel on which a direction is issued will still be able to seek a review of that decision by the panel’s own appeal processes. If circumstances arise in which the facts are only temporary, the panel may wish to deal with those temporary circumstances and ensure that its views are clear to those who might have to address them.

James Brokenshire: I would be grateful for some clarity on the interrelationship between the role of the panel and the criminal sanctions that appear later in the Bill. I am sure we will debate them in due course. If the panel can interpret and provide guidance and directions, will that bind a court to, or persuade it of, a view that it subsequently takes on criminal sanctions arising from a breach of, for example, the rules and requirements of bid documentation?

Mike O'Brien: The courts have always been prepared to take account of the panel’s views, and they have held those views in high regard. As the hon. Gentleman knows, there are a small number of cases in which the courts have been required to intervene. Normally, when they intervene, they—I was going to say defer to, but that is the wrong phrase, and the courts should not defer anyway—place weight on the panel’s views.
The panel has its procedures and the people who serve on it are highly respected. Its appeal committee includes the right hon. Sir Andrew Leggatt and the right hon. Sir Martin Nourse, two former Lords Justice of Appeal. In the circumstances that the hon. Gentleman raises, once the procedures of the panel, and perhaps an appeal, have been worked through, the courts will be able to take account of the panel’s views.
The courts will have to consider the circumstances that arise from the later clause on criminal sanctions. The panel has its own sanctions, and it will determine whether it can use them to deal with a situation. If it cannot, it may be right for the criminal courts to deal with the matter. The hon. Gentleman asked whether the courts will have regard to the panel’s views. They will, but they will not be bound by them. It will be a matter for the court to determine how it deals with those views, but I am sure that, where they are relevant, regard can be had to them.

James Brokenshire: I have a further point to elucidate my line of argument. The issue that I am focusing on in relation to clause 646 on directions that may come from the panel is the interrelationship between this provision and clause 653 on the criminal sanctions for failure to comply with rules about bid documentation. I heard what the Solicitor-General said about the court not being bound by an interpretation that the panel may have in respect of those rules, but I wonder what consideration has been given to the tracks that might arise from a particular course of action. Clause 653(7) states:
“Nothing in this section affects any power of the Panel in relation to the enforcement of its rules.”
That gives weight to what the Solicitor-General said, but I want to be clearer on one issue.
If, for example, bid documentation does not incorporate what it should, that may give rise to a right for the panel to give directions under clause 646 in relation to specific circumstances. It then may be open, in relation to the specifics of the rules, for the prosecuting authority to take a view on what those rules may mean, and ultimately the court would take a view on what those rules may mean. What consideration has been given to the evolving nature of the rules and the requirements of the rules? Up to now, they have largely been interpreted by the panel in terms of the advice and guidance that it offers.
With regard to the statutory framework that we are creating, I can see that different channels of approach might be taken by different agencies on certain issues. The panel might take one view on what the rules may mean, but a court or a prosecuting authority, separate from the panel, might take a different view. It would certainly help my understanding of how the measure is intended to operate to know what consideration the Government have given to whether those potential conflicts would be resolved by co-operation between the relevant agencies or whether there could be circumstances in which the panel takes a view and gives a direction on an issue and subsequently another agency takes a contrary view and therefore there are differing views on what the rules may mean.
That may not be a substantive issue at this point, but I envisage that, as things evolve, concerns may arise as to how the new statutory basis will work. The benefit in the system at the moment is the flexibility and, at the same time, certainty in terms of how the panel operates. Because of the new statutory regime and the involvement of the criminal sanction, the rules and directions given by the panel may not be final. I am referring to the subsequent court sanction and the opportunity for another agency to take a slightly different view of what a rule may mean.

Mike O'Brien: I do not anticipate that the other agencies would take a different view. It may be that the courts—I am not sure whether the courts are included in the phrase “other agencies” in the hon. Gentleman’s question—would take a view. They will obviously have to take account of all the issues in relation to the law and they will form the view that they form. That will be a matter for the courts.
The Crown or the prosecutors, whoever they are, will, in all circumstances, consider all the evidence and have to take a view on whether there is sufficient evidence to justify a prosecution. The standard required is very high. They will be able to look at any guidance or rules produced by the panel. The panel will have its view on how those rules might be interpreted, and no doubt the Crown Prosecution Service, the Serious Fraud Office or whoever it is can take account of the panel’s views about an appropriate interpretation of the rules. I do not envisage that the prosecutors would seek to devise an interpretation of their own about what the panel rules might mean. The question for them would be the straightforward one for any prosecution: does the evidence provide a sufficient basis within the terms of the clause—or, in due course, section of the Act—to enable a prosecution? In other words, does the evidence stack up? The second question would be whether it was in the public interest to prosecute. I do not think that the prosecutors would be looking for a different interpretation.
On the other hand, the courts will look at all the law. They will be entitled to look at the rules put forward by the panel and whether they are appropriate and proper. I would not seek to fetter their discretion in any way, and I am sure that the hon. Gentleman would not try to get me to do so.

Jonathan Djanogly: This has been a relatively short but very interesting debate on the criminal aspect of the provisions. From what the Solicitor-General has said, it seems that we are facing a fundamental change. The fact that the court will have to review the panel’s decisions, but not have to follow them, will mean that there will be room for concerns, on which I elaborated at some length earlier.
The key question is whether there could be a scenario in which the outcome of a court case effectively undermined the status and standing of the panel. From what the Solicitor-General said, it seems that that could happen. That is a matter of concern, which came up in the debate. I am pleased that we raised it.

Question put and agreed to.

Clause 646 ordered to stand part of the Bill.

Clause 647 ordered to stand part of the Bill.

Clause 648

Restrictions on disclosure

Mike O'Brien: I beg to move amendmentNo. 452, in clauseÂ 648,Â pageÂ 318,Â lineÂ 13,Â leave out
‘has been authorised by the Panel and’.

Eric Illsley: With this it will be convenient to discuss amendment No. 526, in clause 648, page 318, line 15, leave out paragraph (a).
Mr. Djanoglyrose—

Mike O'Brien: The hon. Gentleman is so used to rising to speak that he has risen to support a Government amendment. I thank him, but I can do that myself.
Amendments Nos. 452 and 526 are about the disclosure provisions relating to the takeover panel. I say at the outset that we recognise the difficult balance to be struck on provisions relating to the disclosure of confidential information held by regulatory authorities about businesses and private individuals. We are seeking to get right that difficult balance between ensuring that that information remains confidential and ensuring that other agencies and regulators that might properly receive some of that information are able to do so.
Clause 648 restricts the takeover panel’s ability to disclose information except through specific gateways. Government amendment No. 452 is enormously important in enabling us to do that. The clause was introduced to give effect to the provisions in article 4 of the takeovers directive. Let us be clear about what the provisions say:
“Member States shall ensure that all persons employed or formerly employed by their supervisory authorities are bound by professional secrecy. No information covered by professional secrecy may be divulged to any person...except under provisions laid down by law”.
The starting point of the directive is that confidential information should be protected. That must be right. However, the directive also properly recognises the need in certain cases for information to be disclosed between regulators and other persons. If shareholders and others are to be adequately protected in an increasingly complex financial regulatory regime, such exchange of information is essential. That is why the directive permits certain avenues of disclosure in the law. Unless such avenues exist, the information cannot be disclosed; it is as simple as that.
I turn to the substance of the amendments. Amendment No. 452 would reverse an amendment, made in another place, that would impede the exchange of information. It relates to provisions that concern the onward disclosure of confidential information provided to the takeover panel when that information is subsequently passed to other persons or bodies. The clause as it now stands would require that any further onward disclosure of the information be authorised by the takeover panel. I will try to explain why we do not think that the subsequent control by the panel, once the information is effectively out of its hands, is either necessary or appropriate.
There are two reasons. First, we do not think that it is right to require the panel, in effect, to police the onward disclosure by another regulatory body. The panel would not be in a position to assess the relative merits of, say, onward disclosure of information by the pensions regulator to the Director of Public Prosecutions. It simply would not be appropriate for the takeover panel to do that. The takeover panel might not be expected to weigh the respective public interest benefits of disclosure against the need for proper protection of confidential information in such a case and indeed—

Jonathan Djanogly: Will the Solicitor-General give way?

Mike O'Brien: Before the hon. Gentleman intervenes I should like to finish this because it may well be relevant.
Withholding such information, which may well be a crime, may not relate directly to the sort of issues that concern us in later clauses and may relate to a wider fraud. In those circumstances, it probably would be improper for that information to be withheld by the pensions regulator, having had it disclosed to the regulator by the takeover panel.

Jonathan Djanogly: Is not the problem that if someone gives a document to the panel and it is in the public domain, the panel can then hand it to someone else who hands it to someone else and so on? Does not someone have to take responsibility? Does not the person who is handing the document over to the panel, normally on a friendly basis, have the right to know what will happen to that document once it has been handed over?

Mike O'Brien: To some extent they do. The information that is passed to the takeover panel is often commercially quite sensitive. It is certainly information that many of the companies who pass it to the takeover panel would want kept confidential unless they had some level of control over it. I understand the point that the hon. Gentleman is making. However, where that information is passed to another regulator it would be passed only through a particular gateway and to a trusted regulator. It would not be passed into the public domain. That should not happen and we do not propose that it would happen.
We are seeking to ensure that there is a gateway for information to be passed to certain agencies. They can carry out regulatory or other prosecuting functions and would then be responsible for ensuring that, as far as possible, that information remained confidential. Judgments would have to be made, for example by the DPP, if certain commercially confidential information might be disclosed as a result of bringing a case. That would have to be a judgment that was made, of course, in the public interest. In each prosecution there are two tests: first, is the evidence there and does it stack up and, secondly, is it in the public interest to take this case? Those judgments would have to be made and it is not really possible for the takeover panel to be in a position to make those judgments. It is statutorily and otherwise appropriate for the DPP to make them.

Jonathan Djanogly: On gateways, if a person were to hand a document to the takeover panel and the panel passed it on to someone else, would the panel have to advise the original person that their document had been passed on to a third party?

Mike O'Brien: Normally if that information had been passed on to the DPP, the takeover panel would be aware of that. However, the question then arises whether in all circumstances the takeover panel must inform the person about whom that information has been passed. A certain amount of caution needs to be applied here, although it is a perfectly valid question. If that information related to a possible prosecution of a company or individual who had disclosed information to the takeover panel, a judgment would have to be made as to whether it was appropriate for that person to be informed of the nature of the information and what would subsequently happen. Such a decision may have to be taken with great care and after consultation between the various regulatory agencies.
In some cases, there would not be a problem. The takeover panel might say that it had to pass the information to a pensions regulator, and the person would know that the information had been passed on. However, if there were a substantial investigation into a serious criminal offence, the takeover panel might have to exercise a degree of circumspection and caution in its response. It would have to judge, in discussion with others, whether it was appropriate to pass the information on.

Justine Greening: Does the Solicitor-General agree that the legislation is analogous to the Freedom of Information Act 2000 and some of the rules around that? Normally, people would be asked for their consent before documents were released to third parties. The Government might consider using that template to give third parties some assurance.
On the broader point, have the Government assessed whether documents could fall within the scope of the 2000 Act? Would people be able to write to the takeover panel with freedom of information requests? Would they be able to get takeover panel documents by writing to third parties to which the documents had been passed on?

Mike O'Brien: I do not think that the analogy with the FOI legislation is appropriate. This information is intended to be confidential, not freely disclosed. The clause is not about freedom of information. I cannot envisage any circumstances in which the documents would be made public through the granting of an FOI request. People can make requests about many things, but often the FOI legislation will not require that information be disclosed, as the hon. Lady knows. This is commercially sensitive information. Exceptions in the FOI Act ensure that such information can be kept confidential.
The panel itself does not fall under the FOI legislation. I believe that the hon. Lady is asking whether there would be an obligation to disclose information that was passed to another agency that is a public authority in the terms of the FOI Act. I cannot give an absolute assurance on that, but I can give a fairly strong one. It is difficult to imagine information that would be passed on in such circumstances. It would have to go through the various tests in the FOI legislation. Therefore, people can pass information to the takeover panel with a strong degree of reassurance that if it ever had to be passed on—normally, of course, it would not be—it is unlikely that it would be easy to disclose it publicly under FOI legislation.

Jonathan Djanogly: We are dealing with restrictions on disclosure of information provided to the panel. In some ways, the provisions are more complicated than they look. The extent to which the consent of the individuals concerned will be required for the panel to disclose information was debated in the other place, and at one stage Baroness Noakes and Lord Hodgson both attempted to have the clause deleted. Lord Hodgson stated:
“It has been argued to us that this is a very broad statement, and that it seems to allow the panel to disclose information in any case so long as it can attribute it to facilitate the carrying out of its functions. That could be argued to cover almost any disclosure made by the panel at all in any circumstances. With that in mind I return to the purpose behind the amendment, which is not to hinder the workings of the panel, but rather to probe the Government on the drafting in this case. We see no compelling argument as to why this exclusion is so widely drafted.”—[Official Report, House of Lords, 28 March 2006; Vol. 680, c. GC291.]
Despite what has been said, I still have concerns.
The protections from disclosure of information about an individual or a business provided under the clause do not apply to disclosures
“made for the purpose of facilitating the carrying out by the Panel of any of its functions”.
To some extent, the provision was amended in the other place by including the phrase
“has been authorised by the Panel”
and I am sorry that the Government wish to reverse that change in amendment No. 452.
Having heard the Solicitor-General, I am not entirely sure that he is totally on top of the situation; I think that items can still be teased out. It may be dealt with on Report, but the nightmare scenario of documents getting lost in the public system, going from one regulatory agency to the next without anyone being told, could cause fear among those who have heard our debates.

Mike O'Brien: The hon. Gentleman is creating fear stories unnecessarily. We need to make it clear that the further onward disclosure would in any event remain subject to the same controls on disclosure that applied to the information when it was in the hands of the takeover panel. It can be further disclosed only under the same tightly controlled circumstances, laid down in clause 648, that applied to the panel.

Jonathan Djanogly: Is the Minister saying that because equivalent clauses in other legislation apply to other regulatory authorities?

Mike O'Brien: I am saying that it is passed on conditionally. For example, we do not want to enable a regulator to pass such information to the DPP or some other agency. Frankly, I do not think that the hon. Gentleman would want us to allow that information to go to such an agency. Confidential information should remain confidential, but it is also right that the proper regulatory authorities should be able to do their duty in the proper way.

Jonathan Djanogly: I am not entirely sure on what basis the Solicitor-General says that the same restrictions would follow from one agency to the next. Perhaps he will enlighten me further. I still feel that it is a broad provision.

David Howarth: The confusion is that the words that the Government seek to remove seem to be those that they are now relying upon when saying that conditions can be imposed on further disclosures. The argument is becoming rather circular.

Jonathan Djanogly: I agree; indeed, I was thinking that as the Minister was speaking. I thank the hon. Gentleman for bringing that to the notice of the Committee.
We feel that it is an important issue. The panel has always worked on the basis of trust. Now that the framework is to be put into statutory effect, we should recognise how sensitive is much of the documentation that it receives and how carefully the panel must consider its disclosure.

James Brokenshire: In the context of sensitivity, does my hon. Friend have any thoughts on the interrelationship between clauses 648 and 650 on the panel’s duty to co-operate—particularly, under clause 650(1)(c), with bodies outside the United Kingdom? Given that one of the panel’s functions is the duty to co-operate, and given the provisions of clause 648, would the panel therefore be obliged to provide information to overseas bodies without restriction?

Jonathan Djanogly: That is very likely. My hon. Friend highlights another concern. We are assuming that the document going overseas will be misused. That may or may not be the case, but it broadens the scope of my point. I thank the hon. Gentleman for making his point.

Justine Greening: We are on an interesting topic because we have raised the hypothesis of an overseas, regulatory body which makes a fulfilled request for information and documents from the takeover panel with which it complies, and those documents then go into another jurisdiction, under the laws of which they might be able to be accessed as information. In the internet age, that would mean that they could be accessed by everyone.

Jonathan Djanogly: My hon. Friend makes a good point. In times of the internet, once a document goes out of control, it really does go out of control and everyone tends to know about it.

Mike O'Brien: It is important that those types of fear stories should not be given any credence at all. That was not a good point. In clause 648, the restrictions both on employees—those who receive documents within the takeover panel—and disclosure will continue to apply.
In future, there are likely to be greater safeguards on confidential information than there are now. Therefore, people can continue to treat the takeover panel with the degree of proper respect and confidentiality with which they currently treat it now.

Jonathan Djanogly: It is certainly recognised by the panel that despite its role becoming enshrined in statute—from a day-to-day perspective—it still intends to operate in much the same way as it has in the past. That means working on the basis of trust. However, for that to happen, people will have to have confidence in the confidentiality of what they hand over to the panel. One bad incident could undermine years of carefully built-up trust. It would not take much—

Mike O'Brien: Why does the hon. Gentleman think that there is going to be even one bad incident? There has not been since 1968. Why does he suddenly think there is going to be one now? The risk of his comments—which are read outside this place—is that people will think that there are intentions in this legislation that are not there.
It is important that we maintain confidence in the takeover panel. It is fair and reasonable for him to put forward his amendment. There is not anything between us in terms of what we would like to see. The issue is whether the amendment that he is putting forward is necessary to achieve it, and I say that it is not, or whether the Government amendment is necessary to achieve what we would both want to see, and I believe it is.

Jonathan Djanogly: We are starting to go round in circles. Having listened to the debate, I believe that the amendment put forward by our noble Friends in the other place was a correct one. I will be asking the Committee to oppose amendment No. 452.

Justine Greening: I rise to support my hon. Friend the Member for Huntingdon. In spite of the good intentions, there are some potential dangers fraught in clause 648. I have no doubt that the Government’s intentions are good. The question is how do they play out in practice?
Multi-billion pound deals are increasingly taking place across jurisdictions and borders. Only recently, in my own area, BAA was taken over by a Spanish company. It is increasingly likely that documents will be shared between international regulatory bodies. Therefore, between now and Report stage, it is incumbent on the Government to look at this matter more carefully and, if necessary, to take action within the Bill to assure companies that when they pass information on to the takeover panel that it is confidential, as intended.
One reason why the takeover panel has worked so successfully as a self-regulating independent body is that its high level of honesty has made it possible to raise difficult issues with the panel. If people were worried about the scrutiny that issues might receive outside, or about the possibility that documents might be passed to third parties and ultimately become public, they might just hesitate about disclosing them to the panel, which would not be good.
I raise those concerns mainly because, like the Solicitor-General, I want to ensure that the takeover panel retains such high integrity that people have no issues about fully disclosing potential information about their business deals.

Shailesh Vara: Does my hon. Friend agree that the European Union’s stated objective of creating “an ever closer Union” will increase the chances of documents being disclosed? That is particularly true given that businesses are getting closer and that multinationals are co-operating on takeovers, as she said.

Justine Greening: Clearly, that is the way the business world is going. Many of us on the Committee have worked for international companies, and that is the way of international business today.

Mike O'Brien: It is important that our comments in this place, and particularly on issues such as this, are made with care. In particular, it is important that we maintain confidence in the panel and that we do not get carried away discussing various speculative fear stories that might undermine that confidence. I am therefore happy to accept that we go back to the takeover panel to ask whether it is content with the position that we have arrived at. My officials advise me that it is, but given the hon. Lady’s concerns, I am happy to have a further word with the panel to ascertain its view on this matter.

Justine Greening: I am encouraged by the Solicitor-General’s comments, because these are important issues. They are also difficult issues, and I have no intention as an Opposition Back Bencher of creating fear stories, but it is the Opposition’s responsibility to raise potential loopholes. It is far better to raise them now than to find out about them when the provisions are in law and companies that could be performing well are being hindered purely because we did not do our scrutiny job well.
This is an important issue, and I am grateful that the Solicitor-General will look at it in more detail. I have some further comments on schedule 2, but I shall return to them at the appropriate time.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 8.

Question accordingly agreed to.

Clause 648, as amended, ordered to stand part of the Bill.

Schedule 2

Specified persons, descriptions of disclosures etc for the purposes of section 648

Question proposed, That this schedule be the Second schedule to the Bill.

Justine Greening: I have a number of points to make about what the long list in schedule 2 will mean in practice. I apologise for the fact that my speech will probably not be the most eloquent that I shall give in the House; it is more a list of queries than anything else. Nevertheless, if the Solicitor-General can give clarification on the schedule’s meaning and on the Government’s intention, that would be helpful in the progress of the Bill towards Report.
Clause 648 provides that change to schedule 2 will be subject to the negative resolution procedure, so the content of the schedule is important. My first question concerns part 1 of the schedule, which is entitled “Specified persons”. The first person mentioned is the Secretary of State, but it might be worth clarifying exactly which Secretary of State is meant. Is it any old Secretary of State, or is it—presumably—the one for the Department which will have responsibility for the legislation?
The second point was raised in the other place and concerns the sixth category of specified persons: the commissioners for Her Majesty’s Revenue and Customs. There is potential for a scenario in which the takeover panel is both gamekeeper and poacher, which would not be desirable, so we need to be careful that people who interact with the panel in the course of deals do not feel compromised by the range of parties to whom the information that they might share might be passed on.
The 10th specified person is “A constable”, which seems slightly ad hoc. I presume that that is a member of a police force, but the point is worth clarifying.
Part 2 of the schedule is entitled “Specified descriptions of disclosures”. It contains a whole range of descriptions that would merit clarification. For example, the description in paragraph 24 is:
“A disclosure for the purpose of enabling or assisting a person appointed by the Treasury to hold an inquiry into matters relating to financial services (including an inquiry under section 15 of the Financial Services and Markets Act 2000)...to exercise his functions.”
It would be helpful to know just how wide ranging such an inquiry might be, because the inquiries covered are not purely those under section 15 of the Financial Services and Markets Act, but potentially others too. How might such an inquiry relate to the Financial Services Authority, which presumably would be the key operator in that area?
Paragraph 29 is about pensions law. Two pensions reform Bills are likely to come through the House in the coming months and years, and one of them will concern the money purchase pension scheme, which might well be provided by external third parties in the financial services arena. We should be careful that parties that might end up bidding to provide that scheme do not feel concerned that if they hand over information to the takeover panel it will be used by the Government to assess any tendering process under the MPPS legislation. I assume that any further pension legislation will be included in the schedule by negative resolution, as is proposed, but I add a word of caution considering that so much fundamental pension reform is about to pass through the House.
Paragraph 31 mentions:
“A disclosure for the purpose of enabling or assisting...the central bank of any country or territory outside the United Kingdom...to exercise its functions.”
That seems incredibly broad. Will the Solicitor-General tell us why there should be a duty to disclose to the central bank of any country or territory and under what circumstances that might happen? Surely the British Government wish us to have restrictions in place and some criteria by which we might assess whether requests for information and documents are appropriate. In light of our previous discussion we need greater specificity from the Government on how paragraph 31 will work in practice.
Paragraph 32 covers a disclosure, which I have mentioned,
“for the purpose of enabling or assisting the Commissioners for Her Majesty’s Revenue and Customs to exercise their functions.”
That might strike terror into the hearts of most companies, making them fear that their dealings with the Revenue will not take place through the gateway to which they have become accustomed. Similarly paragraph 34, on the Office of Fair Trading, might cause some concern to companies dealing with the takeover panel. They might want assurance on the basis on which documents could be passed to such bodies. Of course we fully support those organisations in the carrying out of their duties, but the Bill lacks detail on the basis on which such requests will be made, the extent to which there will be consultation with parties that provide documents to the panel and the time that a company will have to give feedback to the panel before documents are passed on.

Mike O'Brien: I am listening with care as the hon. Lady goes through her list. She should not think that there will always be a duty to disclose. The schedule instead provides a right to disclose in certain circumstances, for instance to the central banks, so that the takeover panel can do so if it wishes. We are considering a prohibition on the disclosure of confidential information and the question is whether there should be gateways through which the takeover panel has a right to disclose information.

Justine Greening: I take on board the hon. and learned Gentleman’s comments. I am seeking a level of certainty and I am concerned about the uncertainty on how the schedule will work in practice. If there is to be not a duty but a potential for documents to be passed between organisations, that may be appropriate, but the Bill lacks clarity on the conditions under which that can happen and a reasonableness test to judge whether requests are reasonable or excessive.
Paragraphs 38 to 41 are on potential disclosure to the Charity Commission and the National Lottery Commission. One again wonders under exactly what circumstances such a disclosure would be necessary and what was in the Government’s mind when they put together the schedule and specifically included those bodies rather than others.
Perhaps one of the more obscure disclosures is provided for in paragraph 45:
“A disclosure for the purpose of enabling or assisting a local weights and measures authority in England and Wales to exercise its functions under section 230(2) of the Enterprise Act 2002”.
That makes one wonder whether a company could be in trouble for submitting details to the takeover panel in feet and inches rather than using the metric system. Again, the measure applies a level of detail to the documents, the parties to whom they may be passed and the reasons for doing so that is really quite obscure. Reading through the schedule, one is left wondering exactly why it is so far-ranging and whether it would not benefit from some tidying up, along with a few more provisions to provide clarity on how information may be exchanged and according to what criteria.
The Minister will be pleased to know that I am reaching a conclusion—I realise that the list has been slightly long. Paragraph 58 provides for a disclosure
“for the purpose of enabling or assisting an overseas regulatory authority”.
That seems to be something of a catch-all disclosure, in relation to which I flag up the concerns that I raised earlier about data protection and freedom of information requests outside our jurisdiction.
We have already talked about paragraph 70, which is:
“A disclosure in pursuance of any Community obligation.”
Again, the range of what could be captured by such a disclosure request seems remarkably broad. I am not sure that it is wise to have such a broad term in the schedule. Finally, from the fundamental to the obscure again, I finish by asking for clarification on paragraph 69, which provides for:
“A disclosure for the purpose of the provision of a summary or collection of information framed in such a way as not to enable the identity of any person to whom the information relates to be ascertained.”
It seems that there are not enough verbs in that. It is not clear to me exactly what it means, so some translation of paragraph 69 into common English would be welcome. In what circumstances would it be used, why and by whom? It would be helpful to know what on earth paragraph 69 would mean in practice.
I have run through a list of questions, as I said I would. Given how important information is to business today, how vital it is that businesses understand where information flows are going, to whom information will be passed on and why, and the fact that trust underpins the takeover panel’s remarkable success in discharging its duties since its inception in the late 1960s, the issue is worth considering carefully and in detail, to ensure that we are not taken down a route of information usage that was not intended.

Mike O'Brien: The schedule sets out some of the gateways. The list of the various potential gateways is not exhaustive and can be varied from time to time if circumstances change, as should be expected. The powers in relation to clause 630 to add to, delete from or alter those in the list will ensure that it remains up to date and relevant.
We are creating not a range of duties, but a range of rights, so that the decision rests with the takeover panel in all but one case. Therefore, what we have proposed is, by and large, an ability for the panel to make a number of judgments.

Justine Greening: My understanding of the previous clause on which we voted is that we have struck out the panel’s ability to authorise such disclosures. I wanted to clarify whether that was correct.

Mike O'Brien: That is incorrect. The panel can authorise disclosures, provided there is an appropriate gateway to access that disclosure of information. It has to decide that it wishes to disclose information, and it can then do so.

David Howarth: Will the Solicitor-General give way?

Mike O'Brien: In just a moment. Let me deal with the point first.
The panel might take the view that a particular request is not appropriate, and therefore decide not to disclose. If there is a view that that is improper, that might have to be tested in the courts. However, we are creating an option for the panel, and it will decide whether a request is appropriate, and will choose whether to disclose information.

David Howarth: Does the Solicitor-General believe that the panel is authorised to put conditions on its release of information, especially the onward release of information? If that is his view, the debate that we just had was largely otiose.

Mike O'Brien: The same conditions shall apply as those that related to the takeover panel. The takeover panel was subject to confidentiality restrictions, and it will be incumbent on those who receive the information to observe the same restrictions, subject to any obligation that they might have in law to pass that information to somebody else. For example, the pensions regulator, to whom I referred earlier, might have an obligation in respect of information about fraud and therefore to a subsequent gateway, although it might not be described in those terms in the legislation.
Subsection (2) states that the panel must not further disclose information, so the information is tagged to that effect wherever it goes. That is subject to the caveat that the body to which it is disclosed might be subject to an obligation, and that obligation might arise in law. The information is safeguarded all the way through the process. I hope that everybody accepts that, with those safeguards, the information is adequately protected.
On the points raised by the hon. Member for Putney (Justine Greening)—

David Jones: Will the Solicitor-General give way?

Mike O'Brien: I am trying to deal with the point made by the hon. Member for Putney, so unless it is on that particular issue—

David Jones: I am grateful. The Solicitor-General has referred to a request for a disclosure. Does he anticipate that, in practice, a disclosure will invariably be made in response to a request, or can he foresee circumstances in which the panel may make a disclosure to a relevant body of its own volition?

Mike O'Brien: The panel may well be made aware of circumstances—for example, when an offence has been committed—in relation to which it takes the view that it has a moral obligation to disclose further. It might be more than a moral obligation in certain circumstances, so it could decide to pass information to another agency of its own volition, but I anticipate that any disclosure of information is more likely to be the result of a request. To some extent I am guessing when I say that, in most cases, it will be possible for the request to be refused on the basis that the information is confidential. Therefore, if a body asks for information about a bid or transaction, the panel is likely to say no because the information is confidential. However, we want to provide the opportunity—the gateway—to get around the confidentiality in cases in which the panel takes the view that it is important that that should happen, or in which it has an obligation to ensure that that happens. We are being quite restrictive in the various gateways available.
The hon. Member for Putney described a list of potential gateways, and I shall not go through all of them. I shall deal with one of them at a bit more length, but I think that she is seeking an assurance. Are we creating an obligation to disclose information to the organisations—the answer in most cases will be no—or are we creating a right to do so if the panel chooses? In that case, whatever safeguards exist on the takeover panel will continue to exist. That is by and large the case.
The hon. Lady raised the issue of weights and measures. It appears a little odd on the face of it, but weights and measures is the old-fashioned but still legally correct term for consumer protection departments in local authorities. They began as people who checked for short weight in particular products, and as a result, archaic lawyers apparently use the phrase to refer to local consumer protection departments. Given that lawyers continue to be archaic for long periods, I am afraid that the description will continue.

Jonathan Djanogly: Will the Minister enlighten the Committee as to why the takeover panel should want to pass on documents to local authorities?

Mike O'Brien: Rather than saying that it is likely to want to do anything, we are saying to the panel that if it feels that that is appropriate, the gateway will enable it to do so. It is not for us to speculate on the circumstances. If I did, I would speculate that the panel might become aware of a particular company’s approach that ought to be dealt with by a consumer protection department, and might feel that it was of such importance that it should be passed on. I do not know. We need to examine what potential gateways the takeover panel might wish to have and ensure that, if appropriate, it has those gateways. If it chooses never to use them, that would be its decision.

Jonathan Djanogly: Is not the word “gold-plating”?

Mike O'Brien: No, it is not. It is ensuring that we trust the takeover panel. It is important that we preserve its ability to set its own rules, procedures and obligations, preserve confidentiality and give it gateways to provide access to information for certain organisations where that is appropriate and the panel chooses to do so.

Question accordingly agreed to.

Schedule 2 agreed to.

Clause 649 ordered to stand part of the Bill.

Clause 650

Panel’s duty of co-operation

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The notes state that article 4.4 of the directive requires that takeover supervisory authorities and financial services regulators provide reasonable assistance to other such authorities within the EEA for the purposes of the directive. Hon. Friends have highlighted potential concerns over the release of documentation, which we have just debated.
That leads me to the scope of the duty of co-operation provision. It would be helpful if the Minister explained the scope of the clause, provided some practical examples of its use and explained whether he considers that requests for such assistance are likely to grow as a result of the Bill or for other reasons.
Subsection (2) seems somewhat bizarre. Why is it necessary? Is it only to show that co-operation may not include showing information that the panel is prevented from disclosing? Is that not how it would normally be versed? I should be interested to hear the Solicitor-General’s views.

Mike O'Brien: Article 4.4 of the takeovers directive requires that the takeover supervisory authorities and financial services regulators provide reasonable assistance to other authorities within the European economic area for the purposes of the directive. In implementing the directive, clause 650 is designed to give effect to that requirement by obliging the panel to co-operate with the overseas takeover and financial services regulatory authorities.
The form and manner of co-operation will be as the panel considers appropriate in the light of the circumstances, in particular its power to require documents and information may be exercised to support such an authority, and may include sharing information which the panel is not prevented from disclosing. Essentially, that is the provision in subsection (2), which says what it means. It states:
“Co-operation may include...sharing...information that the Panel is not prevented from disclosing.”
The clause mirrors similar co-operation obligations imposed on the Financial Services Authority by section 354 of the Financial Services and Markets Act 2000. That is an important point.

Jonathan Djanogly: I thank the Solicitor-General for his explanation so far. It would be helpful if he would give us a reason why this measure is needed. What will it be used for in practice?

Mike O'Brien: This is a requirement of the takeovers directive, and it is a matter for the panel to decide how it is used. The panel is broadly supportive of the provisions. They give the panel the ability to make decisions where it thinks they are appropriate. It is not for us to set out in the Bill the circumstances in which the panel can do various things. The panel has operated quite successfully since 1968, and we are enabling it to continue to do so. Broadly, in these circumstances, we can trust it to make the appropriate decisions.

Jonathan Djanogly: I should be interested to hear a little more on what would happen if European co-operation was needed at the moment, and on how this proposal is likely to improve matters.

Mike O'Brien: The panel can co-operate, in so far as it feels appropriate, with any other appropriate regulatory authority. The hon. Gentleman knows that it has been a wish not only of the current Government but of his party when it was in Government back in 1989 that the other European countries should set up similar authorities. They are obliged to do so under the directive, and they are setting up such authorities. I understand that it was the wish of his party’s Government and the Labour Government when they came into office that a level of greater co-operation should now be possible between the various bodies that have been set up.

James Brokenshire: I rise briefly to obtain clarification on a few items. We note that under clause 650 the panel must take steps to co-operate with the relevant agencies and bodies that are specified. We have obviously debated subsection (2) in that regard. It states:
“Co-operation may include the sharing of information that the Panel is not prevented from disclosing.”
I want to probe those last words a little more, and I hope that the Solicitor-General may be able to provide some guidance on them.
From my understanding of what clause 648 says about the general authority to disclose, the panel has the ability to disclose things for
“the purpose of facilitating the carrying out by the Panel of any of its functions”.
Does “functions” cover the language in clause 650(1)? I am slightly confused about the circumstances in which the panel may be prevented from disclosing, because clause 648 would suggest there is no impediment to its disclosing, given that it would appear to be part of its functions to co-operate with those agencies. Therefore, clause 648 itself seems to give the panel the permission to disclose. That might be a misreading in my interpretation of the interaction between the two clauses. It would be helpful for me to understand the interrelationship between them and the circumstances in which the panel might be prevented from disclosing, given that clause 648 would seem to allow it in any circumstances in which it facilitates carrying out its duties.
My second query relates to article 4.4, which referred to being within the EEA. Clause 650(1)(c) is much broader in its aspect in not being limited to the EEA and I should be grateful for clarification of the Solicitor-General’s thoughts on that point. Perhaps he will say why the broader ambit was considered appropriate. I suspect that it is to facilitate good regulation across markets throughout the world. I can see the sense in broadening it beyond the EEA, given that we have capital markets in the far east and the United States and sharing information between those two markets might be appropriate, but some clarification would be appreciated.
The Solicitor-General referred to section 354 of the Financial Services and Markets Act 2000, which states that the Financial Services Authority can
“take such steps as it considers appropriate to co-operate with other persons”
sharing similar functions to those of the authority, language that is reflected in clause 650. Section 354 also states that that should be in relation to the prevention or detection of financial crime as defined within the Financial Services and Markets Act, and that the FSA has the ability, and almost an obligation, to co-operate with criminal authorities.
Although the Solicitor-General may say that in part that may be captured by the ambit of schedule 2 and the operation of clause 648, I want to confirm that the phrasing of the proposal will be wide enough to capture co-operation to prevent financial crime from occurring. I entirely see the merit in ensuring that agencies work together to crack down on financial crime, and the thought processes involved in incorporating that type of language within clause 354 of the Financial Services and Markets Act but not incorporating a similar type of approach in clause 650, as the Solicitor-General himself indicated that there is a broad equivalence between the two provisions for the FSA on the one hand and the panel on the other.

Mike O'Brien: The process is that the panel is restricted from disclosing confidential information. However, gateways are available to it to disclose information in particular circumstances. It has a general obligation to co-operate with various other outside and non-UK agencies as it considers appropriate. The most important words in the clause are in subsection (1), which states:
“The Panel must take such steps as it considers appropriate to co-operate”.
That gives the panel great discretion and enables it to make whatever decision it feels is appropriate in particular circumstances. The clause goes wider than Europe; it applies to regulators outside Europe. Clause 652 simply makes it clear that as part of the co-operation process, the panel can disclose information if it considers it appropriate.
Under section 354 of the FSMA the panel is able to disclose information outside the EU, and clause 652 enables a similar level of disclosure. However, financial crime is not the main part of the panel’s remit, unlike that of the Financial Services Authority. The provision is thus adapted to the role of the panel; it does not create obligations in relation to crime because that is not an obligation on the panel. It uses the format of section 354 to ensure the existence of a similar provision, with a similar ability to co-operate.
Going beyond Europe enables the panel to take a view about appropriate levels of co-operation with non-EEA agencies, if it feels that it is right and proper to do so.

James Brokenshire: Briefly, the Solicitor-General’s words are helpful. He is right to say that the panel does not have a prescribed role in financial crime in the same way as the FSA, perhaps. I am sure that in practice the panel would co-operate in such circumstances as far as it could.
I have a concern that I would like satisfied: given the information on takeovers that the panel will have, if an agency concerned with financial crime contacted the panel, would the latter co-operate, even if that is not specified in the Bill? In practice, I am sure that it would, but I would be grateful for any further comments that the Solicitor-General may make.

Mike O'Brien: I do not think that I can add anything except to say that there is a general duty to co-operate, but only as the panel considers appropriate.

Question put and agreed to.

Clause 650 ordered to stand part of the Bill.

Clause 651

Hearings and appeals

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause provides for the proper procedures for review of and appeal against decisions taken by the panel in connection with its regulatory functions. Clause 651(1) requires that rules made by the panel
“provide for a decision of the Panel to be subject to review”
by a hearings committee at the request of affected persons specified in the rules. Clause 651(3) provides for a right of appeal, as provided for in the rules, to an independent tribunal—the Takeover Appeal Board—against a decision by the hearings committee. The rules may make provisions in relation to the hearings committee about procedural matters, evidence and the powers of the committee.
Let us take a closer look at the Takeover Appeal Board’s rules. It is an independent body that hears appeals against rulings of the hearings committee. Among its recitals are:
“The Chairman and Deputy Chairman of the Board are appointed by the Master of the Rolls. They will usually have held high judicial office... Other members of the Board, who will usually have relevant knowledge and experience of takeovers”—
and of the code—
“are appointed by the Chairman (or, failing that, the Deputy Chairman) of the Board”,
and the
“names of the members...are available on the Board’s website”.
Furthermore, the board is assisted in its proceedings by a secretary, who will not be the secretary to the hearings committee in the same matter—usually they will be a partner in a law firm.
The rules go on to deal with the quorum and proceedings, and then state:
“The chairman of a hearing may, on behalf of the Board, deal with:
(a) appeals relating to procedural directions of the Hearings Committee; and
(b) frivolous or vexatious appeals,
without convening the Board”,
and
“without an oral hearing”.
The rules state also that the board must provide its decision to the parties in writing
“as soon as practicable”.
The rules then deal with possible remedies:
“The Board may confirm, vary, set aside, annul or replace the contested ruling of the Hearings Committee, and shall remit the matter to the Hearings Committee with such directions (if any) as the Board (or the chairman of the hearing) considers appropriate for giving effect to its (or his) decision.”
The hearings committee will then be required to give effect to the board’s decision.
Subsection (5) provides that rules must contain provisions
“preventing a person who is or has been a member of the committee...from being a member of the Hearings Committee or the Takeover Appeal Board”.
By way of clarification, if a person has served on the panel committee and later—say a few years later—wishes to serve on the hearings committee or the appeal board, would it be possible? Out of interest, has that system of committees—presumably, it is in place because the statutory instrument has gone through—required the recruitment of extra people to serve on the committees?
Finally, I shall raise the key issue in the Lords on that point. Lord Hodgson made various points about the appeal board and the consideration of human rights issues in its constitution. I discussed that issue with the panel which has since confirmed in correspondence that the board’s rules are not made by the panel precisely because of the need to keep the two bodies separate in order to comply with human rights requirements. The board’s rules are made by the board itself, under common law principles. They are summarised in section 8 of the new introduction to the code, and will be made available on the new website, www.thetakeoverappealboard.org.uk; I thought that that should go on the record.

Mike O'Brien: The hon. Gentleman set out what is intended under the clause. The hearings committee is composed of distinguished individuals—I have already said that they are former lords justice of appeal—and it is not envisaged that those people would formerly have served as members of the panel. They are regarded as being broadly independent.

Jonathan Djanogly: I thank the Minister for that clarification.

Question put and agreed to.

Clause 651 ordered to stand part of the Bill.

Clause 652

Sanctions

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: As things stand, if a company breaches the takeover code—

Mike O'Brien: I just want to add a couple of words to my last answer. I said that it is not envisaged that members of the appeal committee would have served on the panel, but in the end that will be a matter for the panel to determine, not us. However, that seems to be the situation at the moment.

Jonathan Djanogly: I thank the Minister for that further clarification, which agrees with how I had read the clause.
On clause 652, the panel can issue private or public statements of censure to any persons who breach the code. The penalties have been remarkably successful in regulating public company takeover activity, as we discussed earlier. The loss of reputation that can follow a censure can be devastating, and it provides a good incentive to play by the rules. Subsections (2) to (8) were added to provide a consultation mechanism for any new sanction, including any possible financial penalty. I certainly agree that any such new sanction should require a policy statement and a thorough consultation period, but my question is why the clause is needed at all. I have heard no suggestions—none from companies or the panel—that the penalties system needs changing, so why do the Government consider the clause necessary?

Mike O'Brien: If the panel does not want to change the system, it does not have to, but the clause gives it the authority to do that if it so wishes. As we have set up the panel on a statutory basis, it is important that we give it the powers that we think it may need in future. Any changes will be a matter for the panel.

Jonathan Djanogly: Belts and braces spring to mind once again, but I hear what the Minister says.

Question put and agreed to.

Clause 652 ordered to stand part of the Bill.

Clause 653

Failure to comply with rules about bid documentation

Jonathan Djanogly: I beg to move amendment No. 525, in clauseÂ 653,Â pageÂ 321,Â lineÂ 17,Â after ‘bid’, insert
‘(but not including any person making the bid as agent)’.

Eric Illsley: With this it will be convenient to discuss amendment No. 527, in clause 653, page 321, line 39, leave out subsection (6).

Jonathan Djanogly: There are two concerns about the clause. First, the categories of persons who could commit an offence are wider than the categories of persons deemed responsible for an offer document under the takeover code. Secondly—this point is dealt with by amendment No. 527—the Government decided to make any breach of the rules about bid documents a criminal offence. They say that that is required in order to implement article 17 of the takeover directive properly. Admittedly, there was debate about that at various stages in proceedings in the Lords, but it is still not clear to me that the panel wants to be responsible for enforcing any breach of the rules relating to offer documents once the bid has been concluded, although it might have to, if is made responsible for imposing penalties for a breach of the rules. Will the Minister give his understanding of the position?
The provisions gold-plate the directive somewhat. The persons who might be liable should be aligned with those who are responsible for offer documents under the rules. I understand that that is affecting current practice, in that some law firms are now advising financial advisers that they should no longer make bids on behalf of the bidding company. That is having an effect already, because the clause is replicated in the Takeovers Directive (Interim Implementation) Regulations 2006, which came into force on 20 May.
I have a copy of a letter of 22 May to Lord McKenzie of Luton, which was written on behalf of the London Investment Banking Association’s corporate finance committee, and which deserves to be put on the record. It states that LIBA is the principal trade association in the UK for firms active in the investment banking and securities industry, and that one of its objectives is to ensure that London remains an attractive location for the conduct of international investment banking business.
In the letter, LIBA states that its members are concerned about the provision which it says establishes criminal liability for failing to comply with the regulations setting the required content of the bid documentation, and notes that the language in the clause was changed as a result of discussions in Grand Committee, and that Lord Goldsmith has described the intended effect of the changes. The letter states that LIBA is concerned that one of the agreed changes removes a reference to agents and employees of offerors by maintaining liability for the persons making a bid. The problem is that it is not clear whether the phrase “the person making the bid” includes the corporate advisers to an offeror if the practice has been to announce each offer on behalf of the bidder. That uncertainty has resulted in some prominent City legal firms advising banks to cease making offers on behalf of their clients to avoid the possibility of liability attaching to themselves as the person making an offer. Manifestly, there is a danger that the settled way of presenting takeovers in the UK will be disrupted by that uncertainty.
The letter goes on to say that, as mentioned in Grand Committee and discussions in the Lords, there is no requirement for criminal sanctions in the takeovers directive. No other EU member is known to be contemplating criminal sanctions regarding offer documentation and there has been no pattern of unacceptable offer documentation in the UK that requires the creation of criminal sanctions to curb such abuse. The letter adds that the stated intention of avoiding the cost of professional advisers for agents and advisers to avoid criminal liability would also be frustrated by a lack of clarity in the criminal liability provisions.

Mike O'Brien: It may assist the hon. Gentleman, who seems to be intent on setting out an argument, if I reassure him that we do not intend that those who act as agents for bidders such as merchant banks in the circumstances that he describes should be criminally liable under the offence provision. We are satisfied that the scope of the offence will not make such persons criminally liable.

Jonathan Djanogly: I hear what the Minister says. On that basis, will he support our amendment to change the word “bidder” to “person making the bid”?

Mike O'Brien: For the reasons that I have just given, we are satisfied that the scope of the offence as drafted will not make such a person a criminal anyway, so there is no need to do so.

Jonathan Djanogly: The long list of London banks, which are supported by a number of City lawyers, would seem to contradict him. The fact remains that the clause is gold-plating of the EU directive. It is not required and, from what I can make out, although the panel does not object to receiving the powers, it did not particularly ask for them. As far as I can tell, no companies and no one in the City has asked for them. Is not this a typical example of Government overkill?

Mike O'Brien: The new bid documentation offence was subject to extensive discussions in another place. I do not want to go into the details of those discussions, as there is no point in repeating all that here. We have given certain reassurances: the test for any offence is high—a person must know about it or be reckless—and it applies only in relation to takeovers and those companies to which the provision will apply, which are limited. For example, they must be trading on a regulated market.
Subsection (6), which amendment No. 527 would delete, is an integral part of the offence provision. It lays down the penalty that will apply when the offence is committed: a fine, which on summary conviction will not exceed the statutory maximum. Without that provision, the offence would remain in the legislation, but there would be no sanction for it. It would have no teeth, and be a nonsense. The offence provisions are a response to the duty imposed by article 17 of the takeover directive, which is to ensure that “effective, proportionate and dissuasive” sanctions are in place to underpin the measures introduced to implement the directive.
We carefully considered all the directive’s provisions in the light of the sanctions obligation imposed by article 17. We took full account of existing sanctions and legal remedies available elsewhere in company and financial services regulation legislation. We also closely examined the sanctions and compensatory powers available to the panel when persons transgress the panel rules. As a result, we identified a specific loophole in our implementing package; the offence provision in clause 653 is designed to address it.
Provisions relating to bid documentation are laid down by articles 6.3 and 9.5 of the directive and they are to be implemented by rules that the panel is obliged to make under clause 643. The panel will, of course, be able to enforce those rules through its usual mechanism. Should the panel conclude that an offer or response document did not meet the requirements of the rules, it could direct that the matter be put right by the offeror or the board of the target company. It could apply to the court to enforce that direction. The panel also has the right of public censure.
Notwithstanding all that, we had specific concerns. The first related to serious or other deliberate mis-statements that came to light only some time after the bid had been completed. In such cases, remedial action of the kind that I have described would no longer assist those interested in the bid. Equally, the kind of information to be included in the bid documentation does not concern only direct parties to the bid such as shareholders of the target company; information has to be provided on matters such as the bidder’s intentions in respect of the future business of the target company, repercussions on employment and the location of the company’s place of business. Clearly, such information is highly important to employees and others who are affected by the bid but have no contractual rights in respect of it.
Consequently, we concluded that it was right to provide for a specific offence in respect of bid documentation. The offence has been refined in the light of concerns raised in another place about a lack of clarity. An offence will be committed when the offence or response document in question does not comply with the rules designated by the takeover panel as giving effect to article 6.3 or 9.5 of the takeovers directive.
An offence would be committed only if the relevant person knew that the document did not comply, or was reckless as to whether it did and failed to take all reasonable steps to ensure that it did. That is a very high test, which will catch only those acting with deliberate intent or in flagrant contravention of their duties in respect of the bid documentation. We consider it necessary, proportionate and targeted. I hope that, on that basis, the amendment will not be pressed.
Amendment No. 525 is different and specific in nature and raises an important issue about the potential liability of the agents. I have made clear our position on agents: we do not intend to criminalise them. We are aware that it has long been City practice that merchant banks deliver the relevant takeover offer documents. In implementing the directive, a key objective has been to disturb as little as possible the existing system of takeover regulation in UK and City practice. It is not Government policy to make agents making bids on behalf of bidders potentially liable for the offence.
In the light of the arguments raised, we tabled an amendment on Report in another place to remove references to agents. We are aware that concerns remain that agents continue to be caught inadvertently by the offence provision. That stems from the use of the phrase “person making the bid”. Might that include agents? We do not believe so. It must be taken to mean the person who intends to take over the target company; I say that knowing that the relevant people will refer to my comments. After all, the agent is not going to enjoy the contractual rights or be subject to the contractual obligations of the offeror.
The amendment seeks to put the issue beyond doubt. However, in doing so, it introduces further ambiguities. For instance, it raises the question of on whose behalf the agent might be acting and in what regard. It is a drafting issue, but the hon. Gentleman’s amendment creates more problems than he thinks. The scope of the offence set out in the Bill will not make criminally liable the agents whom he fears might be liable. It is not our intention that they should be. Therefore we cannot accept his amendment and we do not think that it is necessary. I hope that he will feel able to withdraw it.

Jonathan Djanogly: The question asked in the Lords and which LIBA also asked is whether the clause should be deleted in its entirety. The clause will impose criminal sanctions on
“the person making the bid and where the person making the bid is a body of persons, any director, officer or member of that body who caused the document to be published”,
if he knew that it did not comply or he was
“reckless as to whether it complied”
with the offer document rules and
“failed to take all reasonable steps to secure that it did comply.” 
I have put together a series of arguments from a variety of sources.
First, it has been said that there was no general public consultation by the Department of Trade and Industry or any official body on the proposal to establish a criminal offence of this nature. Perhaps that is wrong and the Solicitor-General might like to comment. Secondly, it is considered by many that the takeover directive does not require that any criminal sanction be established with respect to bid documentation. Further, it was stated and not challenged in the House of Lords that four other nations that have implemented the directive have not established criminal sanctions with respect to bid documentation.
Thirdly, there has been no series of cases involving misleading or inaccurate bid documentation that established the need for the criminal sanction. Indeed, there is a history of approximately 40 years under the takeover code during which there has not been a generally perceived need for such sanctions. Fourthly, the proposed criminal offence is very broadly drawn to include any minor deviation from the requirements set by the takeover code for bid documentation and the requirements may change by a decision of the code committee of the takeover panel, which could effectively redefine the offence.
Fifthly, the proposed offence, which is enacted in the interim regulations, has already resulted in a decision to change practice by some leading investment banks. They have decided to cease making bids on behalf of bidders to avoid any possibility of criminal liability. The Solicitor-General thought that the provisions did not say that and he mentioned that that point had been covered by the Lords. All I can say is that organisations such as LIBA have looked at the Lords debate and at the provisions again with their lawyers and still feel that there is a significant problem.
The potential liability will translate into significant cost increases, time delays and complexities in the bid process, affecting companies and shareholders alike, as companies are forced to ensure that every part of the bid document is beyond criticism. Another point that was raised is that the UK will become less responsive to market forces, which encourage the healthy restructuring of companies and capital. The UK will also serve as a model for other EU nations that may also adopt criminal sanctions, rendering them even less open to the free flow of capital than they are now when compared with the UK. The last point made was that criminal sanctions are best reserved for matters for which civil remedies have been shown to be inadequate. For all those reasons we still have a problem.

David Howarth: The hon. Gentleman made quite a good case for voting against the clause standing part, but I do not think that he has made a good case for his amendment. He has referred to what happened in the House of Lords debate, but the assurances given by the Solicitor-General about the meaning of the particular phrase that he seeks to amend seemed quite categorical. Is there any part of the Solicitor-General’s remarks today that he still finds problematic?

Jonathan Djanogly: The Solicitor-General will correct me if I am wrong, but I think that he based his remarks on what was said in the House of Lords. Many people have looked at those debates and fundamentally disagree with that opinion. If the people putting their names on the offer documents are to have a problem with that, we need to address that. If it can be addressed by changing a few words, it is worth doing.

James Brokenshire: The point is that if we could clarify the language, it would be of assistance. Does my hon. Friend agree that, although the Solicitor-General has made some helpful comments about interpretation, if so many people have already thought that the person making the bid would incorporate the corporate finance house, as time goes on and people interpret the Act, what was said in Committee, however important in a court, may not be so important in practice? Therefore, we want to ensure that we clarify the Bill as much as possible.

Jonathan Djanogly: Absolutely. I agree with my hon. Friend. This is an important clause, and that is why I shall press the amendment to the vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 7, Noes 13.

Question accordingly negatived.

Clause 653 ordered to stand part of the Bill.

Clauses 654 to 656 ordered to stand part of the Bill.

Clause 657

Fees and charges

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: Will the fees and charges payable to the panel need to increase as a result of the changes? Will the provisions affect the cost of running the panel?

Mike O'Brien: That will be a matter for the panel. Historically, the takeover panel has had no such revenue-raising powers and it has been funded through two main sources—document charges and the levy. In that way, the cost of the regulation of takeovers is borne jointly by those involved directly in bid activity and participants more generally involved in the financial markets. The existing model of financing should be mirrored in the new statutory regime. It enables the panel to make rules for the payment of fees or charges to the panel.

Question put and agreed to.

Clause 657 ordered to stand part of the Bill.

Clauses 658 to 660 ordered to stand part of the Bill.

Clause 661

Exemption from liability in damages

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: I note under clause 660 that although the panel is an unincorporated body, it is given the right to bring or defend proceedings in its own name. Clause 661 provides for people who work for the panel or its secondees to claim a judicial type of immunity. Has an assessment been made of the extent to which the panel will be more open to civil claims following the new measures, and will the Solicitor-General confirm that the taxpayer will not have to pay for any damages awarded against the panel?

Mike O'Brien: It is not anticipated that the taxpayer will end up funding damages; nor is it envisaged that the panel will be the subject of extra litigation. The anticipated result—the hoped for outcome—is that once the panel is set up on a statutory basis it will continue to operate broadly as it does now. It is rare for the courts to have to intervene, and we anticipate that it will continue to be rare. However, Ministers cannot prejudge how the panel will develop. We hope that it will not develop in a litigious way, and we see no great reason to anticipate for it to do so. However, we cannot give a firm guarantee that it could never happen.

Jonathan Djanogly: I thank the Minister for that clarification.

Question put and agreed to.

Clause 661 ordered to stand part of the Bill.

Clauses 662 to 665 ordered to stand part of the Bill.

Clause 666

Opting in and opting out

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: Article 11 of the takeover directive seeks, in certain circumstances relating to takeovers, to override a number of defensive devices that may be adopted by companies prior to the bid, such as differential share structures under which minority shareholders may exercise disproportionate voting rights, restrictions on the transfer of shares in the company’s articles on contractual agreements, and limitations on share ownership.
There are currently no restrictions on how UK companies admitted to trading on a regulated market may structure their share capital and control. However, market pressure, particularly that brought to bear by institutional investors, has ensured that few UK listed companies now have differential voting structures. As permitted under article 12 of the directive, it has been decided not to apply the provisions of article 11 in all cases but instead to include in the Bill a provision for companies with voting shares traded on a regulated market to opt in to its provisions should they choose to do so.
This was the subject of some debate in the other place. Indeed, I discussed the philosophical side of it this morning, but I do not intend to go over that again. [Interruption.] A smile crosses the Solicitor-General’s face. However, I discussed the matter with the panel. It is worth recording that it set out its position in correspondence. It said that it would come back, principally in relation to the Grand Committee debate, on these clauses. That debate was about how the Government propose implementing article 11 of the takeover directive.
Articles 9 and 11 of the directive are both concerned with reducing barriers to takeovers. Article 9 provides a framework for preventing a board from frustrating a takeover bid. Article 11 provides a framework for preventing shareholders who hold a minority of the share capital but who have disproportionately high voting rights from blocking a bid. Article 12 gives member states the option of imposing articles 9 and 11 on all companies registered within their territories. If the member state chooses not to impose either of those articles—that is, to opt out—it must nevertheless, by virtue of article 12(2), give companies the option, which must be reversible, of choosing to apply the articles individually.
Article 9 is consistent with the fundamental principle underlying the takeover code; accordingly, it was always the Government’s intention that it should be imposed on all UK registered companies having shares traded on a regulated market. The UK has therefore opted in, and article 9 is being implemented under rule 21(1) of the code, which has been amended to reflect the specific provisions of the article.
On article 11, the question whether certain voting structures should be imposed on companies is a matter for company law and is not, therefore, a part of the directive over which the panel has any responsibility. As a result, the panel has never been involved in any debate with the Government about how the optional provisions of article 12 would apply to article 11, save to clarify that it would be concerned if the legislation undermined irrevocable commitments. The DTI has proposed not imposing article 11, partly because the shareholding structures concerned are rare in the UK and partly because it does not wish to restrict companies’ flexibility to construct share structures as they see fit.
Having reviewed the Lords debates on this chapter and taken soundings, we are generally of the view that the Government have got the implementation of the directive right. However, we have continued to receive reports, mainly from City solicitors, that the wording of the clause is confusing and that it might be helpful if the Government published a more detailed explanatory note to reflect what has been said, not least in the other place.

Mike O'Brien: I have to say that, in clause 666, the devil is in the detail—[Hon. Members: “Oh dear.”] I had to get that one in. An explanatory note on the clause would be extremely long, and there is actually a good description of how the clause would work in the DTI consultation document on the matter. Indeed, I was reading it last night to get my mind around some of the detail of the opting in and opting out arrangements in relation to article 11. I shall certainly consider whether a more detailed explanatory note would be of assistance and discuss the matter with my right hon. Friend the Minister for Industry and the Regions. I am not convinced that such a note would be of assistance, but I shall consider the matter, and we shall write to the hon. Gentleman about whether that is the appropriate way forward. However, it is an enormously complex area.

Question put and agreed to.

Clause 666 ordered to stand part of the Bill.

Clause 667 ordered to stand part of the Bill.

Clause 668

Effect on contractual restrictions

Jonathan Djanogly: I beg to move amendment No. 462, in clauseÂ 668,Â pageÂ 328,Â lineÂ 26,Â leave out
‘in value of all the voting shares’
and insert
‘of the capital carrying voting rights’.

Eric Illsley: With this it will be convenient to discuss amendment No. 463, in clause 668, page 328, line 34, leave out
‘in value of all the voting shares’
and insert
‘of the capital carrying voting rights’.

Jonathan Djanogly: We come to the effect on contractual restrictions. We query the use of the phrase
“75 per cent. in value of all the voting shares”
in subsection (2)(b) and (d)(ii). That is a change from the directive, which refers to
“75 per cent...of the capital carrying voting rights”.
The Government resisted using the directive’s wording in the other place, saying that their formulation was consistent with the wording in the Companies Act 1985. In addition, there was a debate in the Lords about whether “in value” meant nominal value or market value. Originally, Lord Goldsmith confirmed that it meant nominal value, but that was challenged by Lord Hodgson. The Government seem intent on leaving it to the courts to interpret what is meant by that phrase, but our point remains: why not simply clarify the issue now?

David Howarth: The clause contains some obscurities, and I should like the Solicitor-General to elucidate another one. Subsection (6) refers to compensation for people whose agreements are broken as a result of the clause, but will it apply to people who make such agreements after the Bill has come into force? It could be argued that someone who made such an agreement after the Bill had come into force did so in the knowledge that the law would allow it to broken and that they should not, therefore, be allowed the benefit of the compensation clause. If the Solicitor-General could explain how the provision will apply to late-coming agreers, I would be grateful.

Mike O'Brien: The directive uses a European style of phraseology but we have a different way of describing things in English law. There is a choice between the two, and we have chosen to interpret the directive using conventional English company law terminology. We could have copied the text from the directive or used what is called the elaboration approach, which involves using UK terminology to achieve exactly the same thing. We believe that we have achieved exactly the same thing, and that the wording that we used is better than the phraseology used in the directive.
The courts would have to consider with great care how the UK’s directive was described. Greater clarity would not be added if an expression that does not mean much in itself were used. The provision in the Bill would have to be interpreted against the background of European legislation. We do not know what the European Court of Justice, for example, would make of capital carrying voting rights or 75 per cent. of them.

Jonathan Djanogly: The point is that we would avoid exactly that problem by more closely following the directive. If a case goes to the European court, the judge would make a decision that would apply to all countries. Instead, we will have something separate that will stick out and possibly be questioned at a later stage.

Mike O'Brien: I do not think that we would be better off taking the hon. Gentleman’s view. Arguably, his approach might be better before the European court, but it probably would not be better before a UK court. Our courts are used to the way that things are described in UK legislation. If we start changing it, they will want to know why. They would then have to consider other interpretations of the phraseology in other parts of European legislation and in other parts of UK legislation in which we have used European wording, and we would end up back in the somewhat confused position that the hon. Gentleman seeks to avoid.
We are better off elaborating—that is the expression—the directive wording to bring it in line with UK company law, and to use words with which the UK courts are familiar. They can then interpret the cases. If cases ever get to the European Court of Justice, perhaps at that point the hon. Gentleman’s suggestion would apply, but most cases will be decided in courts in this country. Therefore, it is better that we use wording that is appropriate to this country.
As far as the comments of the hon. Member for Cambridge (David Howarth) are concerned, the clause provides that agreements entered into between shareholders of the company on or after 21 April 2004—the date on which the takeovers directive was adopted—and agreements entered into between a shareholder and the company before as well as on or after that date, are invalid in so far as they impose any of the restrictions set out in subsection (2).

Jonathan Djanogly: We are where we are on this one, and it can be cut either way. I hear what the Minister says and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 668 ordered to stand part of the Bill.

Clauses 669 and 670 ordered to stand part of the Bill.

Clause 671

Interpretation of Chapter

Jonathan Djanogly: I beg to move amendment No. 464, in clauseÂ 671,Â pageÂ 330,Â lineÂ 37,Â leave out paragraph (a).
There is concern that, as defined, clause 671(2)(a) will mean that convertible shares that convert into shares carrying voting rights will be caught by the threshold provisions in clause 668. That was not discussed on Report in the House of Lords, but was at earlier stages. We have received legal opinions that say that the point has not been addressed by the Government’s amendments to, for example, clause 668(8)(b). Clause 668 now states:
“A reference...to voting shares in the company does not include...shares that, under the company’s articles of association, do not normally carry rights to vote at its general meetings (for example, shares carrying rights to vote that, under those articles, arise only where specified pecuniary advantages are not provided).”
It is still unclear how those provisions tie in with the definition of voting shares in clause 671. I appreciate that this is technical stuff, but the Minister might like to reflect on it.

Mike O'Brien: The hon. Gentleman is familiar with the arguments set out by the Attorney-General during the debate in another place. We are rehearsing many of those debates here, and given that the hon. Gentleman is familiar with them, I do not believe that I need to repeat them. I shall continue to reflect on the issues, but I do not think that any change in our view is likely.
On a separate matter, may I return to the hon. Gentleman’s point about the appeals committee? In correcting myself, I may have over-corrected myself, in that I was right on the first occasion and when I tried to give the panel the power to vary, I probably went further than I needed to. A person who has been a member of the code committee cannot sit on the appeal board. I hope that that clarifies the matter. When a belt-and-braces approach is attempted, sometimes the belt and braces do not work too well and the trousers drop.

Jonathan Djanogly: The Minister said it all when he said that this is a replay of a debate in the other place. We wanted to make the point again, because we still believe that it is relevant, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 671 ordered to stand part of the Bill.

Clauses 672 to 674 ordered to stand part of the Bill.

Clause 675

Takeover offers

Question proposed, That the clause stand part of the Bill.

Eric Illsley: With this it will be convenient to discuss that schedule 3 be the Third schedule to the Bill and the following: Government new clause 352—Meaning of “takeover offer”.
Government new clause 353—Shares already held by the offeror etc.
Government new clause 354—Cases where offer treated as being on same terms.
Government new clause 355—Shares to which an offer relates.
Government new clause 356—Effect of impossibility etc of communicating or accepting offer.
Government new clause 357—Right of offeror to buy out minority shareholder.
Government new clause 358—Further provision about notices given under section (Right of offeror to buy out minority shareholder).
Government new clause 359—Effect of notice under section (Right of offeror to buy out minority shareholder).
Government new clause 360—Further provision about consideration held on trust under section (Effect of notice under section (Right of offeror to buy out minority shareholder))(9).
Government new clause 361—Right of minority shareholder to be bought out by offeror.
Government new clause 362—Further provision about rights conferred by section (Right of minority shareholder to be bought out by offeror).
Government new clause 363—Effect of requirement under section (Right of minority shareholder to be bought out by offeror).
Government new clause 364—Applications to the court.
Government new clause 365—Joint offers.
Government new clause 366—Associates.
Government new clause 367—Convertible securities.
Government new clause 368—Debentures carrying voting rights.
Government new clause 369—Interpretation.

Mike O'Brien: I am speaking to these Government new clauses on the basis with which I am sure hon. Members are familiar. I shall wait to respond to any claims, wishes or questions that they have in relation to clause stand part.

Jonathan Djanogly: I put the Opposition’s position on the Government new clauses on the record this morning and I will not make the point again. We simply have not had time to consider them and, along with everyone else who has been consulted on them, we will not do so in reality until the summer. I think that we are all clear on that, so there will be a bit of summer reading to be done.
On clause 675, which ties in closely to schedule 3, the concept of the squeeze-out and sell-out is very important to the bidder gaining complete control of the target and not having residual minority shareholders. It is also important to minority shareholders being able to receive value for their shares. The main changes are set out in the notes:
“Calculation of squeeze-out threshold (new section 429(1), (1A), (2A) and ((2B)) - there is a dual test imposed: in order to require the minority shareholder’s shares, the bidder must have acquired both 90 per cent. of the shares to which the offer relates, and 90 per cent. of the voting rights carried by those shares. Where the offer relates to shares in different classes, then, in order to acquire the remaining shares in a class, the bidder must have acquired 90 per cent. of the shares of that class to which the offer relates, and 90 per cent. of the voting rights carried by those shares. Currently, in each case only the first limb of that test applies”.
Does the Minister not consider that that new dual test could inhibit the use of the squeeze-out with the impact that more minority shareholders would be caught in the target company, possibly against their will? Will the Solicitor-General explain how this European provision came about and whether he is considering reviewing how this works in practice?
My second concern is more about timing. Section 429(3)(a) states that the squeeze-out notice cannot be given after the end
“of three months beginning with the day after the last day on which the offer can be accepted;”.
That period seems to be open-ended. The Government suggested in Grand Committee that that should be clarified by the panel. However, it has recently been pointed out to us that the panel does not appear to have taken advantage of that opportunity in finalising its new rules, and therefore that the drafting is still unclear for practitioners. The position might have changed since I received that advice, so I would be grateful for the Solicitor-General’s comments.

Mike O'Brien: Modifications are required to bring existing provisions of the 1985 Act dealing with the problems of residual shareholders following the successful takeover bid into line with directive requirements. Clause 675 and schedule 3, which introduce the amendments to replace those provisions, are important. They are concerned with squeeze-out and sell-out rights. As the hon. Gentleman described, they are designed to address the problems of the residual minority shareholders.
The clause and the schedule have two main purposes in amending part 13A of the 1985 Act. The first is to bring existing squeeze-out and sell-out rights into line with articles 15 and 16 of the takeovers directive, which introduced EU-wide laws on those matters for the first time. Secondly, we wish to implement a number of company law review recommendations that relate to those matters.
I will not set out in any great detail the points raised by the various provisions. They are important, but also complex. We think that the dual test to be imposed would seldom make any difference. In practice, 90 per cent. of capital and 90 per cent. of voting rights will usually mean much the same thing. Only in those companies that have restructured themselves so that the voting rights and the shares do not always conjoin is that likely to produce an issue. The period during which a bid can remain open is a matter for the panel to consider in amending its own code.

Jonathan Djanogly: That may be relevant to unlisted public companies because unusual share structures are more likely to exist in them. People often do not realise that the code applies or they are less likely to apply it in a way that they might in a larger company in a listed context. In practice, this may be a tricky area. Such companies are most likely to have minority shareholders who will not want to get left behind.

Mike O'Brien: I hear what the hon. Gentleman says, but even in those companies it is likely that if minority shareholders are concerned about the circumstances they face, they will seek appropriate legal advice in relation to what rights they might have. In those circumstances, they will obviously be made aware of the provisions in the legislation.
We do not want to create a dual squeeze-out regime applying differently to listed and unlisted companies. It is better to have clear legislation, so that when lawyers come to advise those who might feel aggrieved in some way, those people can be given clear advice. There should not be constraints in terms of the company’s perspective on whether the advice applies. On that basis, we have taken the view that it is better to cover both listed and unlisted companies.

Crispin Blunt: For ease of reference, I have not been able to identify from the helpful information that the Minister for Industry and the Regions sent to us when we received the new clauses whether these proposals contain any change to the 1985 Act wording. Can the Solicitor-General assist us and say whether the new clauses alter the wording?

Mike O'Brien: There will be some changes in the wording to ensure that it fits in with particular clauses, but the aim is that the impact of the legislation and how it affects the law should be the same.

Jonathan Djanogly: Will the Solicitor-General also address my second point, which is about the squeeze-out notice not being given after three months? I made a timing point as well.

Mike O'Brien: I thought I had dealt with that. The period during which a bid can remain open is a matter for the panel to consider within its code. The panel will deal with that.

Eric Illsley: We are negativing clause 675 stand part and schedule 3 stand part. As for the Government new clauses that we have debated, we will vote on them on Thursday, if we ever get that far, when we reach them in the Bill.

Question put and negatived.

Clause 675 disagreed to.

Schedule 3 disagreed to.

Sitting suspended.

On resuming—

Clause 530

Prohibition of public offers by private companies

Jonathan Djanogly: I beg to move amendment No. 503, in clause 530, page 255, line 42, after ‘securities’, insert
‘or warrants, options or convertible debt that may confer an entitlement on the holder to acquire securities’.

Eric Illsley: With this it will be convenient to discuss the following amendments: No. 501, in clause 530, page 256, line 6, leave out ‘six’ and insert ‘three’.
No. 504, in clause 530, page 256, line 10, leave out ‘it acts’ and insert ‘the directors act’.
No. 505, in clause 530, page 256, line 12, leave out ‘it undertakes’ and insert ‘the directors undertake’.
No. 502, in clause 530, page 256, line 16, leave out ‘six’ and insert ‘twelve’.

Jonathan Djanogly: We move on to part 17, which deals with private and public companies. Chapter 1 is about the prohibition of public offers by private companies.
Section 81 of the Companies Act 1985 prohibits a private company from offering any shares or debentures to the public, and the meaning of “offer to the public” is set out in section 742A. Clause 531 continues the prohibition in section 81(1) of the 1985 Act on private companies offering their shares or debentures to the public. The prohibition refers to securities of the company defined in clause 535 as shares or debentures. It is thought that as the prohibition applies to offers of shares or debentures in allotments or in an agreement to allot shares or debentures, the drafting will catch any warrants, options or convertible debt that may confer an entitlement on a holder to acquire shares or debentures. Amendment No. 503 is designed to clarify that.
Clause 530(1)(b) replaces section 81(1)(b) of the 1985 Act.

Margaret Hodge: We are discussing clause 530. The hon. Gentleman said “clause 531”.

Jonathan Djanogly: We are debating clause 530(1)(b). Private companies continue to be prohibited from allotting their securities with the intention that they are offered to the public by someone else. This is presumed to be the case if securities are offered to the public within six months of their allotment or before the company receives the whole of the consideration due to it in respect of them.
The explanatory notes for clause 531 state:
“An offer will not be an offer to the public if it is not calculated to result in shares or debentures of the company becoming available to anyone other than those receiving the offer...Nor will an offer be an offer to the public if the offer is otherwise a private concern of the person receiving it and the person making it.”
Clause 531(3) is similar to section 58(3) of the 1985 Act, which it replaces. No change is intended, and the presumption is capable of rebuttal. However, six months seems a long time for the presumption to remain, so amendment No. 501 probes whether the period could be changed to three months to reduce uncertainty.
Under clause 533, a company does not contravene clause 530 if an offer to the public is made in good faith as a part of an arrangement under which it is to re-register as a public company before the securities are allotted, or if part of the terms of the offer are that it undertakes to and does re-register in no more than six months from the making of the offer. The provision will certainly be welcomed by practitioners and is of practical benefit.
Again to probe, I ask whether the period in which the offer can be made could be extended to 12 months. That is because the announcement of the move to public status may be made—and probably would be—at the company’s annual general meeting, say, in contemplation of a flotation. To have 12 months would mean that the company would have a clear year before its next AGM, which might be more convenient in terms of the length of time for which its share issue approval resolutions were put in place.
In Grand Committee, Lord Sharman moved an amendment to subsection (3), the effect of which was to narrow the scope of the clause. Lord McKenzie said
“Subsection (3)(a) of Clause 525”—
as it was then—
“ensures that the prohibition on offering shares or debentures to the public does not apply if the offer or the agreement to allot shares or debentures is done in good faith in pursuance of arrangements under which the company is to reregister as a public company before the shares or debentures are allotted. Subsection (3)(b) similarly exempts offers which include as part of their terms an undertaking by the company to reregister as a public company within six months of the offer. This enables a private company intending to go public to make an offer to the public before it has completed the formalities of reregistration, without breaching clause.
The exemption also recognises that despite the good faith intentions of the company, the reregistration application might fail or the arrangements to reregister might be derailed. Circumstances can change; for example, the company might suffer an unexpected downturn in trading, such that it no longer meets the requirements of Clause 92”—
as it then was—
“as regards its net assets. In those cases, we do not consider that the company should be held at fault under these clauses for the things it has done in the good faith expectation that it would become a public company.”—[Official Report, House of Lords, 14 March 2006; Vol. 679, c. GC451.]
Although the substance of the measures seems sensible, the question is whether it is adequate for the company to be exempted. The members of the company provide authority for share issues, but the directors enter into agreements to issue shares. Should it not therefore be the directors, rather than the company, who are protected by the provisions? Amendments Nos. 504 and 505 would provide for that.

Margaret Hodge: We consider amendment No. 503 to be unnecessary. We included an extended definition of securities when we introduced the Bill in another place which sought to include various indirect ways in which rights to share or debentures could be conferred. We were persuaded that that was both dangerous, in that the long, detailed definition was unlikely to prove useful for as long as commercial practice develops, and unnecessary, in that the simple prohibition on offering or allotting share or debentures to the public already catches indirect ways of achieving the aim, such as by offering options or warrants.
On amendment No. 501, we do not think it appropriate to shorten the period to three months. The six-month period is the same as in section 58 of the 1985 Act. Indeed, the period has been set at six months since the Companies Act 1928 and seems to be a realistic period for such a rule, in that if there is an offer to the public in less than that time, the onus will be on the company to displace any suspicion that it issued the shares with a view to that particular offer to the public taking place.
Amendments Nos. 504 and 505 refer to the behaviour of directors. We do not believe that that is appropriate. The purpose of the chapter is to distinguish private companies from public companies. The prohibition on offering securities to the public applies to the company. Changing one provision to refer to the behaviour of the directors rather than that of the company would simply confuse the operation of the part.
We know what amendment No. 502 would do, but we see no need to relax the requirements even further. The purpose of the chapter is to ensure that public company rules apply to any company that makes offers to the public. The six-month period was chosen as it seemed more than a reasonable length of time for a company to comply with its promises to re-register.

Jonathan Djanogly: My point was that in practice resolutions are often taken in the AGM and then worked through during the year, which gives the directors the chance to explain to the members what they are going to be doing during that time. That is why I thought that 12 months would be appropriate. Has the Minister considered that?

Margaret Hodge: Our view is that it would be too easy to evade the requirements in the clauses, which might deny those members of the public who subscribe to shares the additional protection that public company status provides. The six months will run from the offer, not the AGM.

Jonathan Djanogly: Having heard the Minister, I am not sure that much progress has been made on any of the amendments, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 530 ordered to stand part of the Bill.

Clause 531

Meaning of “offer to the public”

Jonathan Djanogly: I beg to move amendment No. 506, in clause531,page256,line26,leave out ‘calculated’ and insert ‘intended’.

Eric Illsley: With this it will be convenient to discuss the following amendments: No. 508, in clause531,page256,line31,leave out subsection (4) and insert—
‘(4) An offer is not regarded as an offer to the public if—
(a) it is made to fewer than 100 persons,
(b) it is made on terms allowing the person to whom it is made to renounce his rights, which may only be renounced in favour of a person connected with the company or another person to whom the offer is made, and
(c) it cannot properly be regarded, in all circumstances, as being intended to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer or persons not already connected with the company.
(4A) The Secretary of State may by regulations specify other conditions applicable to an offer which, to the extent satisfied, would result in an offer not being deemed to be an offer to the public for the purposes of this section.
(4B) Any such regulations, as set out in subsection (4A), shall be subject to the affirmative resolution procedure.’.
No. 515, in clause531,page256,line31,leave out subsection (4) and insert—
‘(4) A person does not contravene section 530(1) if—
(a) the offer is made to or directed at qualified investors only;
(b) the offer is made to or directed at fewer than 100 persons, other than qualified investors, per EEA State;
(c) the minimum consideration which may be paid by any person for transferable securities acquired by him pursuant to the offer is at least 50,000 euros (or an equivalent amount);
(d) the transferable securities being offered are denominated in amounts of at least 50,000 euros (or equivalent amounts); or
(e) the total consideration for the transferable securities being offered cannot exceed 100,000 euros (or an equivalent amount).
(4A) Where—
(a) a person who is not a qualified investor (“the client”) has engaged a qualified investor falling within Article 2.1(e)(i) of the prospectus directive to act as his agent, and
(b) the terms on which the qualified investor is engaged enable him to make decisions concerning the acceptance of offers of transferable securities on the client’s behalf without reference to the client,
an offer made to or directed at the qualified investor is not to be regarded for the purposes of subsection (4) as also having been made to or directed at the client.
(4B) For the purposes of subsection (4)(b), the making of an offer of transferable securities to—
(a) trustees of a trust,
(b) members of a partnership in their capacity as such, or
(c) two or more persons jointly,
is to be treated as the making of an offer to a single person.
(4C) In determining whether subsection (4)(e) is satisfied in relation to an offer (“offer A”), offer A is to be taken together with any other offer of transferable securities of the same class made by the same person which—
(a) was open at any time within the period of 12 months ending with the date on which offer A is first made; and
(b) had previously satisfied subsection (4)(e).
(4D) For the purposes of this section, an amount (in relation to an amount denominated in euros) is an “equivalent amount” if it is an amount of equal value denominated wholly or partly in another currency or unit of account.
(4E) The equivalent is to be calculated at the latest practicable date before (but in any event not more than 3 working days before) the date on which the offer is first made.’.
No. 507, in clause531,page256,line31,leave out subsection (4).
No. 348, in clause531,page256,line44,after ‘member’, insert ‘, director’.

Jonathan Djanogly: Amendments Nos. 506 and 348 are straightforward so I shall take them first.
Amendment No. 506 is technical. We suggest that the word “calculation” is used more commonly for numbers or working things out, whereas what we want to get at here is “intention”—a state of mind. That is the reason for the amendment. Amendment No. 348 clarifies what we thought to be obvious: a
“person already connected with the company”
should include not only existing members or employees of the company, but existing directors. Of course, not all directors are shareholders. However, given that directors are responsible for issuing shares, we would consider it bizarre for them to be counted as members of the public for the purposes of the clause.
Clause 531 replaces section 742A of the 1985 Act and explains the definition of “offer to the public” for the purposes of clause 530. It also sets out certain circumstances in which an offer is not to be regarded as an offer to the public. An offer will not be so regarded if it is not calculated to result in shares or other
“securities of the company becoming available to persons other than those receiving the offer”,
or if the offer is
“a private concern of the person receiving it and the person making it.”
An offer is a private concern if
“it is made to a person already connected with the company and, where it is made on terms allowing that person to renounce his rights, the rights may only renounced in favour of another person already connected with the company”,
or if
“it is an offer to subscribe for securities to be held under an employees’ share scheme”—
as defined in section 743 of the 1985 Act—
“and, where it is made on terms allowing that person to renounce his rights, the rights may only be renounced in favour of—
(i) another person entitled to hold securities under the scheme, or
(ii) a person already connected with the company.”
Such offers will not be offers to the public.
For the purposes of the clause, the meaning of
“person already connected with the company”
expands on the definition of section 742A of the 1985 Act to include:
“(a) an existing member or employee of the company,
(b) a member of the family of a person who is or was a member or employee of the company,
(c) the widow or widower, or surviving civil partner, of a person who was a member or employee of the company,
(d) an existing debenture holder of the company, or
(e) a trustee...of a trust of which the principal beneficiary is a person within any of paragraphs (a) to (d).”
A question was raised repeatedly in the Lords and has been mentioned to us again by many practitioners: is that definition good enough to determine what is safe for companies to do? I must tell the Minister that the consensus is still no. I have tabled two alternative provisions in amendments Nos. 508 and 515.
I have received a wide variety of representations on that matter, but shall elaborate on one in particular made by Edward Lukins from Morrison and Foerster. On 27 June in a letter to me he wrote:
“Further to our telephone conversation, I attach a paper outlining the amendment which we would like you to propose to the Company Law Reform Bill.
As I am sure you are aware, the definition of ‘offer to the public’ contained in the current Companies Act has merely been carried forward into the Bill and from a market practice standpoint we regard this as particularly unhelpful for two reasons, namely:
(a) the definition ‘offer to the public’ contained in section 531 serves to bring forward all the ambiguity that surrounded the same definition in the Companies Act 1985;
(b) we have a perfectly sensible and explicit definition of exempt offer to the public set out in section 86 of the Financial Services and Markets Act 2000 which was incorporated into that Act by virtue of implementation of the Prospectus Directive.”
Edward Lukins has usefully provided slightly more detailed explanations. As it is important, I shall address some of the points that he raises. He says:
“Many of the transactions with which we are involved, particularly in Europe, involve investment grade issuers issuing debt securities to US life assurance companies and US municipal pension funds. These offers are always structured so as to fall within exemptions to US securities laws and generally involve multiple legal entities within a European group of companies issuing notes to overseas investors. This is a substantial market and enables large amounts of US capital to be accessed by European companies, and in particular UK companies. On many occasions the ultimate parent company of the issuing entity will be a public company but individual subsidiaries may also offer securities. For example, a German parent and its UK subsidiary might both issue subordinated notes on a cross-guaranteed cross-collateralised basis. In many cases if a UK legal entity is involved, it is likely to be a private limited company as opposed to a public limited company. Also, in many cases we might approach an investor which is a discretionary manager of multiple sub-funds, for example MetLife assurance company which manages over 100 sub-funds.
Pursuant to section 86 of the Financial Services and Markets Act 2000, the position is very clear that these transactions do not constitute an offer to the public by a UK private company; however, the proposed definition of ‘offer to the public’ set out in clause 531 of the Bill carries forward a gloss of uncertainty on the position. Clause 531 has been carried across from the old Companies Act where it is set out in section 742A. This definition itself is carried forward from the 1948 Act and has long been renowned for its ambiguity and lack of clarity. We are currently in the position where we have to rely upon opinions of counsel in order to be able to issue legal opinions supporting the transactions of the kind described above (which are a requirement of the programmes under which this kind of debt securities are issued).
It is our recommendation that this rare opportunity be used to create a single meaningful definition of ‘offer to the public’ which gives certainty to both the market and practitioners. There is a long string of unhelpful decided case law relating to clause 531 and its predecessors which we believe is fundamentally out of line with the approach taken to the concept of ‘offer to the public’ set out in the Prospectus Directive and subsequently incorporated into the Financial Services and Markets Act 2000.
We would also point out that as a result of the implementation of the Prospectus Directive, the UK Listing Authority have removed the requirement that a company be a public limited company from its rules to bring them in line with European jurisdictions which generally do not impose differing requirements in terms of what constitutes an offer to the public on private and public companies as a result of the implementation of the Prospectus Directive. This amendment to the Listing Rules allows private companies to list specialist debt securities on the Official List but again the anomalous restriction in clause 531 still puts an unwanted gloss on the position.
We would accordingly suggest that clause 531 is replaced by the definition of ‘offer to the public’ contained in Article 3(1)(d) of the Prospectus Directive and the full text of section 86 of the Financial Services and Markets Act 2000.
In summary, we believe that the effect of clause 531 is to create an unwelcome and anti-competitive position in English company law. We believe that if the issue is not corrected it will lead to the UK potentially losing access to a substantial capital market on the basis that deals will be structured to circumvent the UK jurisdiction. This could lead to more companies establishing offshore financing vehicles to issue their debt securities rather than having them issued direct out of the United Kingdom. We also believe that the amendments to the Listing Rules, which were introduced as a result of the implementation of the Prospectus Directive and which are designed to allow private company issuers to list specialist debt securities, would also not be used to their full advantage, hence the London Stock Exchange may lose out to overseas exchanges as a result.”
I also have a letter from the managing director of global head of private placements at RBS, which supports that position. The managing director of global banking and markets at RBS also supports it. It is important to note that it is a commonly held view, and I have received many such representations, but as time is moving on, I shall not read them all out.
So far, I have mentioned the response from the big players—people who see the provision creating uncertainty in the global capital markets. There is also an important issue for small English companies that are simply looking to raise money but are not quite at the stage of wanting to go public. If a director of a small company wants to send out details of an investment in it, currently the lawyer he will approach to ask how many people he can send them to will not be able to advise him as a general rule. One could say that the figure is normally between 25 and 50, but the lack of certainty will mean that the director will always—I say this from personal experience—be worried about, and frustrated at, not knowing whether his legitimate wish to offer shares to people will or will not be breaking the law.
I simply do not understand the Government’s position on this issue, and most practitioners do not either. I look forward to the Minister’s further explanation, and I hope it will be positive.

Margaret Hodge: Amendment No. 506 proposes substituting “intended” for “calculated”. That was thoroughly debated in another place, and, as we explained there, “calculated” is the term in the existing provision—section 742A of the Companies Act 1985—and it achieves the effect we want: an objective test of whether the transaction in question would reasonably be interpreted as leading to securities ending up in the hands of a wider class of people than the initial recipients. The amendment would change that, as was explained in the other place, to a subjective test of what was the intention of the company. That would be much more difficult to prove and would make it easier for private companies to get away with circumventing the prohibition of public offers.
Three of the other amendments we are dealing with would, in different ways, change subsection (4). Our view is that there is consensus—

Sitting suspended for a Division in the House.

On resuming—

Margaret Hodge: We clearly talk to different people, but our view is that there is consensus on the proposition in clause 531. We are not making any significant change, and the definition has been in place for decades.
Amendment No. 507 would delete subsection (4), whereas amendments Nos. 508 and 515 would replace it. The purpose of the clause overall is to allow organic growth in a company’s shareholder base. Offers can, for example, be made to a new investor who has been identified as wanting to inject extra capital into the business and take a stake in it, or the company can raise new funds by going to its existing members and employees and their relatives. What is crucial is whether there is a sufficient connection or relationship between the private company and the people to whom securities are being offered. This is not about the number of people. The company may have many hundreds of existing members and employees, and there is no problem in offering them further shares.
Amendment No. 508, however, would enable a company to offer shares to up to 99 people who had no previous connection or relationship with the company. Furthermore, those 99 people could be investment managers who intend to put their discretionary customers into the shares. If a company wants to offer shares and raise money from the general public, it should reregister as public. It is true that reregistration as a public company involves the company in additional regulation in terms of disclosure and of capital maintenance rules, for example. However, that is precisely because we believe that shareholders and creditors of a company that wants to access the capital markets in that way require a different sort of protection from those interested in a private company, which will generally have a more restricted shareholder base.
In our view, the current law strikes the right balance and we do not intend to change this aspect of it. Such an amendment as No. 508 would risk making the exemptions so wide that they would no longer act as an effective distinction between private and public companies. If amendment No. 508 would risk blurring the distinction between public and private companies, amendment No. 515 would make the distinction entirely meaningless.

Jonathan Djanogly: Amendment No. 515 is based on provisions in the Financial Services and Markets Act 2000. Is the Minister therefore saying that that Act is meaningless?

Margaret Hodge: I missed the question.

Jonathan Djanogly: The point that I made earlier was that the figure of 100 was set in statute in the year 2000 as a figure in relation to which, for other purposes, an offer to the public could be disregarded. Why is the Minister saying that it is irrelevant when we come to consider it in this context?

Margaret Hodge: I understood that the hon. Gentleman based his amendment on the 2000 Act, but the purpose of that aspect of the 2000 Act is entirely different from that of this part of company law. The 2000 Act is designed to protect vulnerable investors so that, for example, offers are permitted without an approved prospectus provided that the minimum—

Jonathan Djanogly: What is the purpose behind the offer-to-the-public provisions? Is it not to protect vulnerable investors?

Margaret Hodge: Yes.
The provisions make perfect sense when the aim is to relieve those who raise funding of the need to provide consumer-friendly prospectuses when dealing with professional or experienced investors, but they make no sense in the context that the hon. Gentleman envisages. They would drive a coach and horses through the public-private company distinction. The Bill introduces a number of deregulatory measures for the benefit of private companies. We do not think that it would work if, at the same time, we gave private companies the opportunity to raise unlimited sums of money from an unlimited number of investors who had no previous connection to, or relationship with, the company.

James Brokenshire: I listened carefully to the Minister, and from a practical perspective I respectfully say to her that these things happen. I am concerned to hear that we seem to be creating two different routes of offer to the public for a private company, but not to the public of a public company. That risks creating confusion among practitioners about what we are saying about offers to the public.

Margaret Hodge: In my view, there is no confusion, and perhaps when the hon. Gentleman reads Hansard he will think likewise. As he knows, in the spirit of good will we recognise the importance of the Bill to the business community and stakeholders more widely, so we are prepared to offer three days on Report to ensure the widest opportunity to debate any outstanding matters of concern. If the hon. Gentleman feels that the Hansard record does not make sense, he can come back to me on that point.

Crispin Blunt: I am grateful to hear that we will have three days on Report. It is obviously a shame that we have not debated some matters that could have been considered if the Committee could have returned after the summer, but we are grateful to the Minister for persuading the powers that be who arrange the Government’s business to give us sufficient time to consider issues on the Floor of the House, when the House returns after the recess.

Margaret Hodge: I, too, hope that that happens, and that we fill the time with serious debate.
Amendment No. 348 is more modest in its ambitions: it would add directors to the list of people connected to the company in subsection (5). Offers to people on that list will generally not be regarded as “to the public”. That currently includes existing members and employees and their relatives, but not directors of the company. Many directors of private companies are members, employees or both, so in such cases the directors will already be included in the list of connected persons. Obviously, if directors happen to be neither members nor employees, it does not mean that they cannot be offered shares in the company. An offer by a company to its directors will usually be a private matter between the director and the company. It is the private concern of those involved, and so not an offer to the public.
We seek to preserve the current law on what is an offer to the public, and not to prevent anything that is lawful now. It is not our intention to make the provisions more restrictive or significantly more relaxed than the equivalent provisions in the Companies Act 1985. We would therefore prefer not to make even the minor change of adding directors to the list of connected persons, as their absence from the list should have no practical consequences.

Jonathan Djanogly: I thought the Minister was leading up to a concession on the last amendment, but at the last minute she turned her harder face to it. First, it is important to put it on the record that we in the Conservative party are pleased to hear that she has offered three days on Report. That is the right thing to have done.

Quentin Davies: My hon. Friend is too modest to mention to the Committee that he has played a significant role in this development. I am glad that the Government are thinking about the matter magnanimously and open-mindedly and have agreed with his representations in favour of a third day on Report. That is very important and those outside the House who are following our proceedings will be particularly relieved to hear that news from the Minister this evening.

Jonathan Djanogly: My hon. Friend makes an important point, with which I certainly agree.
On amendment No. 348, as we have said, we think that the Government have got things wrong. Amendment No. 506, frankly, is not important. The Minister fails to appreciate the strength of feeling among practitioners on the definition of “offer to the public”. The fact that something appeared in the Companies Act 1948 does not mean that it is necessarily automatically justified in this day and age. The law in other areas, particularly in relation to the FSMA, has moved on significantly. The law is behind the times, in relation to both large companies that need to raise money on capital markets and small private companies that need to raise funds. We have a significant problem with that.

Paul Farrelly: If the law is so far behind with respect to the capital-raising requirements of the big companies, why is a big flock of Russian giant companies coming to the stock exchange at the moment?

Jonathan Djanogly: Because they are not private companies.

Paul Farrelly: Will the hon. Gentleman give way?

Jonathan Djanogly: No. Let me explain what we are talking about. We are talking about private companies raising funds. Does the hon. Gentleman wish to make another point?

Paul Farrelly: The hon. Gentleman talked about large companies and capital raising. Point made.

Jonathan Djanogly: The hon. Gentleman seems to have overlooked the fact that in recent times there are many large private companies that might wish to raise funds.
I have to say that we think the Minister has it absolutely wrong and I shall ask the Committee to vote on amendments Nos. 348 and 515. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 515, in clause 531, page 256, line 31, leave out subsection (4) and insert—
‘(4) A person does not contravene section 530(1) if—
(a) the offer is made to or directed at qualified investors only;
(b) the offer is made to or directed at fewer than 100 persons, other than qualified investors, per EEA State;
(c) the minimum consideration which may be paid by any person for transferable securities acquired by him pursuant to the offer is at least 50,000 euros (or an equivalent amount);
(d) the transferable securities being offered are denominated in amounts of at least 50,000 euros (or equivalent amounts); or
(e) the total consideration for the transferable securities being offered cannot exceed 100,000 euros (or an equivalent amount).
(4A) Where—
(a) a person who is not a qualified investor (“the client”) has engaged a qualified investor falling within Article 2.1(e)(i) of the prospectus directive to act as his agent, and
(b) the terms on which the qualified investor is engaged enable him to make decisions concerning the acceptance of offers of transferable securities on the client’s behalf without reference to the client,
an offer made to or directed at the qualified investor is not to be regarded for the purposes of subsection (4) as also having been made to or directed at the client.
(4B) For the purposes of subsection (4)(b), the making of an offer of transferable securities to—
(a) trustees of a trust,
(b) members of a partnership in their capacity as such, or
(c) two or more persons jointly,
is to be treated as the making of an offer to a single person.
(4C) In determining whether subsection (4)(e) is satisfied in relation to an offer (“offer A”), offer A is to be taken together with any other offer of transferable securities of the same class made by the same person which—
(a) was open at any time within the period of 12 months ending with the date on which offer A is first made; and
(b) had previously satisfied subsection (4)(e).
(4D) For the purposes of this section, an amount (in relation to an amount denominated in euros) is an “equivalent amount” if it is an amount of equal value denominated wholly or partly in another currency or unit of account.
(4E) The equivalent is to be calculated at the latest practicable date before (but in any event not more than 3 working days before) the date on which the offer is first made.’.—[Mr. Djanogly.]

Question put, That the amendment be made:—

The Committee divided: Ayes 7, Noes 12.

Question accordingly negatived.

Amendment proposed: No. 348, in clause 531, page 256, line 44, after member , insert ‘, director’.—[Mr. Djanogly.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 10.

Question accordingly negatived.

Clause 531 ordered to stand part of the Bill.

Clause 532

Enforcement of prohibition: order restraining proposed contravention

Jonathan Djanogly: I beg to move amendment No. 509, in pageÂ 257,Â lineÂ 20,Â after ‘creditor’, insert ‘(of more than £5,000)’.
The clause enables members, creditors or the Secretary of State to apply to the court for an order restraining a private company from carrying out any proposed contravention of the prohibition on offering shares of ventures to the public. Will the Minister explain why the clause is needed? If someone is in breach of the law against private companies making offers to the public, the law can be enforced and surely someone could go to the court for an injunction in any event—with or without the clause. Why is it necessary? If it is necessary, is there not a concern that a competitor or discontented shareholder could use it vexatiously to inhibit the company?
Amendment No. 509 is a probing amendment intended to give some security against vexatious requests for orders. Has the Minister considered that? Put simply, the amendment says that an application for an order under the clause may be made by a member or creditor of the company, but that the creditor should not be of less value than £5,000. Thus the level is set to provide companies with the confidence that they otherwise would not have.

Margaret Hodge: The procedure is new, and the reason for the clause is to provide civil enforcement procedures to back up prohibition on private companies making public orders. It is a real improvement on continuing to rely on criminal penalties, as in the 1985 Act. There are court procedures for claims brought vexatiously, as the hon. Gentleman undoubtedly knows.
If a company appears to be about to breach the prohibition, it should be restrained. Any member or creditor should be able to apply for an order, and we see no reason why creditors owed less than £5,000 should not be able to apply to the court. There is no risk of small creditors making frivolous or vexatious applications, given their risk of having to pay costs. If the application is justified, the court will make an order preventing the company from making the offer to the public, which it should not do in any case.

Jonathan Djanogly: I have to say that the figure of £5,000 has been included only on a probing basis to make the point that a level should be set to put people off making vexatious claims. I hear what the Minister has to say and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 532 ordered to stand part of the Bill.

Clause 533

Enforcement of prohibition: orders available to the court after contravention

Jonathan Djanogly: I beg to move amendment No. 510, in clauseÂ 533,Â pageÂ 257,Â lineÂ 23,Â leave out subsection (1).

Eric Illsley: With this it will be convenient to discuss the following amendments: No. 511, in clauseÂ 533,Â pageÂ 257,Â lineÂ 37,Â leave out paragraph (b).
No. 512, in clauseÂ 533,Â pageÂ 257,Â lineÂ 37,Â at end insert
‘or
(c) a decision that in the interests of justice no further action be taken’.

Jonathan Djanogly: I apologise for my error in that amendment No. 510 is incorrectly drafted. My intention is not to delete the whole of subsection (1).
The clause introduces a new civil enforcement procedure for breaches of clause 530, which is entitled “Prohibition of public offers by private company”, and replaces the criminal offence imposed by section 81 of the 1985 Act. Amendment No. 510 is intended to probe whether it is wise to confuse the clause and section 459 of the 1985 Act. Will section 459 not apply in any event and might not that reduce the clarity of the position?
If a court decides that a company has acted in contravention of clause 530, it must order the re-registration of the company as a public company, unless it appears to the court that the company does not meet the requirements for such re-registration as set out in part 7 and it is impractical or undesirable to require it to take the steps to do so. If that is the case, under subsection (3)(b) the court may make an order for the compulsory winding-up of the company.
That sounds all very well in theory, but in practice we could be entering dangerous territory with these new provisions. The basic problem could be that the creditors or the shareholders would be hurt first if a company were wound up, rather than the issuing directors who had actioned the wrong. More to the point, if a company is wound up, the secured creditors—normally the bank—will be paid off first. It is likely that the main losers when shares are issued illegally, to the extent that there are losers, will be existing shareholders, who will be paid out last in any insolvency.
In such a situation, a court might say that the company should re-register as a public company, but it might not have the money to do so. The breach of the offer to the public may not, for instance, have raised the £12,500 that a company needs to go public. Public status may be unsuitable for the company or be bound to hinder its development. In such a case, can we be clear about the fact that the court may see that there is a breach but decide in the circumstances to do nothing? Asking that question is the purpose of amendments Nos. 511 and 512.

Margaret Hodge: I assume that I do not need to take amendment No. 510, considering it does not stand as it is read.

Eric Illsley: The right hon. Lady must take the amendment as it is written. I appreciate that the hon. Gentleman said he has made a mistake with it, but she must consider the amendment as it is.

Margaret Hodge: I had read the amendment as probing and was going to take it as such. It considers how the clause relates to sections 459 and 460 of the 1985 Act. If in proceedings brought under those sections it appears to the court that a company has breached or is proposing to breach the public offer prohibition, it must make the orders required under clause 532 or clause 533, as the case may be. That provides another means of enforcement that, crucially, will not depend on an application being made specifically under those clauses.
Uniform implementation will be frustrated if courts do not necessarily make a restraint order or re-registration order in relation to a petition brought under sections 459 or 460. However, doing so will be required following an application under clauses 532 and 533. The requirement will not restrict the court from making any other order on an action brought under the old Act.
I take amendment No. 510 as probing. Amendment No. 511 would remove the option for a court to make an order for the compulsory winding up of the company. However, we believe that the addition of the remedial order option, in response to the debate in another place, has improved and strengthened the clause. There can be circumstances in which the court will decide that winding up is the most appropriate action—for example, if the company was a sham and the public offer was a way of raising money fraudulently. There might well be criminal proceedings against individuals involved, but the best thing to do with such a company is likely to be to wind it up.
Amendment No. 512 is unnecessary. Subsection (3) states that
“the court may make either or both”
of the two types of order. It is therefore clear that there is the option to make no order. There is no need to spell that out.

Crispin Blunt: It does not sound as if the Minister is going to write to my hon. Friend with an answer, but at this stage it might be useful to elicit something from her. She, the Solicitor-General and the Under- Secretary of State for Constitutional Affairs have made a number of undertakings to write to hon. Members with information. The Committee will finish at 2 pm on Thursday.
Can the Minister say whether those undertakings will be delivered on by the time the Committee finishes? If that is not possible, will they be met by the time the House rises for the summer recess? We believe that 27 undertakings have been given, of which one has been delivered so far.

Margaret Hodge: I am sure that that was well in order; I shall take it as being so. We are responding. I have signed three or four letters, and my hon. and learned Friends have signed some too. We shall sign the letters as soon as we get them. They will probably not all be dealt with by Thursday, but if we have promised to write to Committee members about an issue, we will do so.

Crispin Blunt: By the time of the summer recess?

Margaret Hodge: I am giving an undertaking not on timing, but to respond.

Jonathan Djanogly: I am not sure where we got to on amendment No. 510. Perhaps that is because of the hour; I am not saying that the Minister’s response was not comprehensive. However, I shall have to read it with consideration on Report in mind.
I am grateful for the Minister’s clarification on amendment No. 512, the important one of the batch. As things stand, there could be a decision to do nothing. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 533 ordered to stand part of the Bill.

Clause 534

Enforcement of prohibition: remedial order

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The remedial order will be aimed at putting a person affected by anything done in contravention of clause 530 in the position in which they would have been had it not been done. Clause 534(3) states that
“the order may require any person knowingly concerned in the contravention of section 530 to offer to purchase any of those securities at such price and on such other terms as the court thinks fit.”
First, does that mean that an institution instructed by the company to place the shares could be ordered to purchase the shares for the institution? Secondly, could that be used to get the company to repurchase shares that it had illegally issued? If that were the case, could that be done despite other provisions—for instance, the requirement that the company should have adequate distributable reserves?
Complicated issues might arise from the broad nature of the clause. One feels that a number of interesting court cases are to follow. I certainly look forward to hearing the Minister’s views.

Margaret Hodge: Clearly, a lot of that could well be subject to litigation, given the enthusiasm of company lawyers for it. The answer to the hon. Gentleman’s first question is yes; the answer to his second is no.

Jonathan Djanogly: I thank the Minister for her very brief response to what I thought were quite complicated questions, and for her clarification.

Question put and agreed to.

Clause 534 ordered to stand part of the Bill.

Clauses 535 and 536 ordered to stand part of the Bill.

Clause 537

Procedure for obtaining certificate

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The current requirement is that a statutory declaration be made when a company applies for a trading certificate as a public company. That will change to a requirement to make a statement of compliance, which will not need to be witnessed. It will also be permissible to make the statement in paper or electronic form. The explanatory notes say that it will be for the registrar’s rules to specify who may make a statement. As such statements are obviously important documents, will the Minister confirm who will be able to make them?

Margaret Hodge: As I read the clause, it will be a matter for the registrar to set that out in her rules. I imagine that the answer is therefore that the registrar will undoubtedly consult on the rules and at that point we shall see, but it is not a matter for us; it is a matter for the registrar.

Question put and agreed to.

Clause 537 ordered to stand part of the Bill.

Clause 538

The authorised minimum

Jonathan Djanogly: I beg to move amendment No. 513, in clauseÂ 538,Â pageÂ 259,Â lineÂ 24,Â leave out ‘£50,000’ and insert
‘the sterling equivalent of 25,000 euros’.

Eric Illsley: With this it will be convenient to discuss amendment No. 514, in clause 538, page 259, line 24, at end insert
‘, or an equivalent amount in another currency calculated by reference to the appropriate exchange rate prevailing on, or on such date as the company may select being not more than 28 days preceding—
(a) for the purposes of section 91, the date of the relevant special resolution under section 90,
(b) for the purposes of section 536 and 537, the date of the application for a certificate under section 536, or
(c) for the purposes of section 139 of the Companies Act 1985 (cl. 6) (public company reducing capital below authorised minimum), the date of the relevant court order under section 138 of that Act (registration of order and minute of reduction)’.

Jonathan Djanogly: Section 118 of the 1985 Act provides for public companies to have a minimum share capital of £50,000. The clause implements article 6 of the second company law directive, 77/91/EC, although the directive provides only for a minimum of 25,000 ecu, expressed in local currency. Clearly, that minimum is significantly less than the £50,000 requirement in the UK.
Amendment No. 513 is probing and it has been tabled for two reasons. First, if the Bill is deregulatory, why should we not make it easier for companies to go public, and why is the £50,000 requirement being retained? What good comes of it? Secondly, we have just been debating the possibility that a court may force re-registration of a private company that offers shares to the public. Would that not become more palatable if the statutory minimum capitalisation figure were reduced?
Amendment No. 514 is intended to cater for the new provisions that facilitate adoption by companies of share capital denoted in a foreign currency. That process requires a date to be set for the prevailing exchange rate to be determined, and our suggestion is the one proposed in the amendment.

Margaret Hodge: On the first question, we have merely taken forward the company law review’s propositions and conclusions. It thought, and we saw no reason to disagree, that a minimum share capital of £50,000 is commensurate with the benefits that flow from plc status. If the authorised minimum needed to be increased or reduced as a result of amendments to the second company law directive, the change could be made by regulations under section 2(2) of the European Communities Act 1972.
The subject matter of amendment No. 514 was considered when the Bill was dealt with in Grand Committee. Reference was made to the case of re Scandinavian Bank Group plc, in which Mr. Justice Harman took the view that article 6 seemed to require EU member states to impose on public companies incorporated within the EU a minimum share capital in their own currency.
When there is a redenomination, people can re-denominate into euros. Therefore, the only aspect of the amendment with which I have some sympathy is the question whether people should be able to denominate in the first instance in either pounds sterling or euros. Both would have to be provided for, and we shall examine that on Report.

James Brokenshire: I am grateful to the Minister for agreeing to consider that. For the record, that is a practical matter that comes up quite frequently, particularly when companies account in a currency other than sterling. It therefore makes sense to have their share capital denominated in the accounting currency as well. I have seen absurd situations in which a company has created classes of share to deal with that, reserving a £50,000 share capital in sterling merely to comply with this measure. I am gratified and welcome the right hon. Lady’s comment.

Margaret Hodge: I should make it clear that we are not talking about all currencies. There can be denomination either in sterling or in euros. Otherwise, there are problems with exchange rate definitions.

Jonathan Djanogly: I thank the Minister for her response. The £50,000 amendment was probing and her comments on different currencies being used have been helpful. We look forward to seeing what the Government come up with in due course. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 538 ordered to stand part of the Bill.

Clause 539 ordered to stand part of the Bill.
Further consideration adjourned.—[Steve McCabe.]

Adjourned accordingly at twenty-two minutes past Nine o’clock till Thursday 20 July at Nine o’clock.